Euro

:For other uses, see {{PAGENAME}} (disambiguation) or EUR (disambiguation).

Euro exchange rate

Against the US dollar

After the introduction of the euro, its exchange rate against other currencies, especially the US dollar, declined heavily. At its introduction in 1999, the euro was worth USD $1.18; on 26 October 2000, it fell to an all time low of $0.8228. It then began what at the time was thought to be a recovery; by the beginning of 2001 it had risen to nearly $0.96. It declined again, although less than previously, reaching a low of $0.8344 on 6 July 2001. The currency then began to recover against the U.S. dollar. In the wake of U.S. corporate scandals, the two currencies reached parity on 15 July 2002, and by the end of 2002 the euro had reached $1.04 as it climbed further.

Related Topics:
US dollar - 1999 - 26 October - 2000 - 2001 - 6 July - 15 July - 2002

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On 23 May 2003, the euro surpassed its initial trading value for the first time as it again hit $1.18, and broke the $1.35 barrier (€0.74 = $1) on 24 December, 2004. On 30 December, 2004 it reached a peak of $1.3668. Some analysts expected the euro to continue to strengthen against the dollar, a few even suggesting $1.60 by the end of 2005. However, the dollar started to recover in 2005 and few analysts today are as inclined to predict the long term trend as confidently.

Related Topics:
23 May - 2003 - 24 December - 2004 - 30 December - 2005

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Currencies pegged to euro

Drivers

Part of the euro's strength in the period 2001-2004 was thought to be due to more attractive interest rates in Europe than in the United States. The US Federal Reserve has had maintained lower rates than the ECB for these years, despite key European economies, notably Germany, growing relatively slowly or not at all. This is attributed in part to the ECB's duty to check inflation across the Eurozone, which in high-performing countries such as Republic of Ireland is above the ECB's target.

Related Topics:
Interest - Federal Reserve - ECB - Republic of Ireland

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However, although the interest rate differential formed part of the backdrop, the main a posteriori justification for the euro's continuing ascent against the dollar was the concern over the huge unsustainable US current account deficits. The market has been awash with concerns about the US twin deficits, which have been a key driver of dollar weakness. The US budget deficit is about $427 billion, or 3.7% of gross domestic product (GDP), while the current account—the broadest trade measure since it adds investment flows—hit a record $166.18bn shortfall in the second quarter of 2004.

Related Topics:
Current account - Deficit - Twin deficit - Budget deficit - Billion - Gross domestic product

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A key factor is that a number of Asian currencies are rising less against the dollar than is the euro. In the case of China, the renminbi was until recently pegged against the dollar, whilst the Japanese yen is supported by intervention (and the threat of it) by the Bank of Japan. This means much of the pressure from a falling dollar is translated into a rising euro.

Related Topics:
Renminbi - Yen - Bank of Japan

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The euro's climb from its lows began shortly after it was introduced as a cash currency. In the time between 1999 and 2002, eurosceptics believed that the weak euro was a sign that the euro experiment was doomed to fail. It may be that its weakness in this period was due to low confidence in a currency that did not exist in "real" form. While the overt conversion to notes and coins had not yet occurred, it remained possible that the project could fail. Once the euro became "real" in the sense of existing in the form of cash, confidence in the euro rose and the increasing perception that it was here to stay helped increase its value. This effect was probably significant in the euro's decline and recovery between 1999 and 2002, but other factors are more significant since then.

Related Topics:
1999 - 2002 - Eurosceptics

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Another factor in the early decline of the euro was that many investors and central banks sold large portions of their legacy (national) currency holdings once the irrevocable exchange rates were set, as the goal of holding multiple currencies is to dampen losses when one currency falls. Once the exchange rates between Eurozone countries were pegged against each other, holdings in German marks and French francs (for example) became identical. There is also some reason to believe that significant sums of illegally held monies were sold for dollars to avoid an official and public exchange for euros.

Related Topics:
Central banks - Marks - Francs

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Consequences

Despite the euro's rise in value, as well as the value of other major and minor currencies, the US trade deficits continue to rise. Economic theory would suggest that a fall in the dollar and a rise in the euro should lead to an improvement in US exports and a decline in US imports, as the former becomes cheaper and the latter more expensive. However, this depends to some extent on how currency costs are passed down the supply chain. Furthermore, the declining dollar makes foreign investment in the US cheaper (although also reducing the return), so that continuing foreign investment may underpin the dollar to some extent.

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The role of the dollar as the world's de facto reserve currency helps support both the dollar and the US budget deficit — but it depends on the continued willingness of foreigners to finance both. Central banks and others finance the budget by acquiring newly-issued, dollar-denominated US government bonds, which they need to acquire dollars for. If at some point foreigners become unwilling to accept new bonds at the prevailing interest rate (perhaps because the falling dollar is reducing the bonds' value too much), the dollar will fall even more — or the US will have to raise interest rates, which would reduce economic growth.

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There is speculation that the strength of the euro relative to the dollar might encourage the use of the euro as an alternative reserve currency; Saddam Hussein's Iraq switched its currency reserves from dollars to euros in 2000. Moves by central banks with major reserve currency holdings such as those of India or China to switch some of their reserves from dollars to euros, or even of OPEC countries to switch the currency they trade in from dollars to euros, will further reinforce the dollar's decline. In 2004, the Bank for International Settlements reported the proportion of bank deposits held in euros rising to 20%, from 12% in 2001, and it is continuously rising. The falling dollar also raises returns for US investors from investing in foreign stocks, encouraging a switch which further depresses the dollar.

Related Topics:
Reserve currency - Saddam Hussein - Iraq - India - China - OPEC - Bank for International Settlements

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The rise in the euro should dampen Eurozone exports, but there is little sign of this happening yet. The main reason is that the currencies of Euroland's major world-wide customers are also seeing their currencies rise relative to the dollar. As the current account deficits continue to rise and the US plans no austerity measures to curb foreign imports and increase exports, the situation may cause the US dollar to lose its position as a hegemonic currency replaced by either the euro or the euro and a basket of currencies.

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• Current dollar/euro exchange rates (BBC)
• Current and historical exchange rates against 29 other currencies (European Central Bank)
• Historical exchange rate from 1971 till now