The US Dollar and the Euro: Deus Ex-Machina

Lorca-Susino, Maria (2008): The US Dollar and the Euro: Deus Ex-Machina. Published in: European Union Miami Analysis (EUMA), Special Series, , Vol. Vol. 5, (April 2008): pp. 1-12.

Abstract

Until the 19th and mid-20th centuries, economic theory explained that the economic status of a country was represented by the strength of its currency. This strength is measured by the exchange rate of one currency vis-á-vis another currency, a “zero-sum” game in which one currency gains what the other loses. In fact, during the 19th century, the strength of the Pound Sterling facilitated Britain’s global hegemonic political and economic power known as the Pax Britanica. During the 20th century, the strength of the US dollar represented both the economic and political hegemony of the US around the world known as the Pax Americana. Nowadays, the weakness of the US dollar is making specialists wonder if we are witnessing the end of Pax Americana and the beginning of something else, possibly a Pax Europea, led by the strength of the euro. This is the argument surrounding the current behaviour of the US$-€ exchange rate and its effect on the economic performance of these two economic blocs. While the current exchange rate between the US dollar and the euro has been considered a blessing for the US, it has become a matter of concern for most Eurozone countries. In fact, we are witnessing an unprecedented scenario where the country with a weak currency is actually pleased and the group of countries with a strong currency is worried. The strength of the euro is becoming irritating for the Eurozone and, nevertheless, the weakness of the US dollar is also pushing it to the brink of losing its status as a global currency. This exchange rate debate is accompanied by another debate concerning how the latest monetary policy actions taken by the US and Eurozone monetary authorities , aimed at solving current economic imbalances, are affecting the US$-€ exchange rate. Scholars, economists, and politicians argue that these monetary policies seem unable to solve today’s economic problems in the EU as well as in the Eurozone, but are having a tremendous impact on the US$-€ exchange rate. This paper will explain in layman’s terms the relationship (or lack thereof) between two of today’s most important economic issues: the US dollar and euro exchange rate, and the monetary policy behind it.

• Item Type: MPRA Paper
• Language: English
• Keywords: Monetary policy, Euro, US Dollar,
• Subjects: C - Mathematical and Quantitative Methods > C3 - Multiple or Simultaneous Equation Models ; Multiple Variables > C32 - Time-Series Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes ; State Space Models; E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy; A - General Economics and Teaching > A1 - General Economics > A10 - General; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles

References

Helmut Frisch, ¨The Euro and Its Consequences: What Makes a Currency Strong?¨ Atlantic Economic Journal, Vol.31, No. 1, (March 03).

Eurointelligence, “Martin Feldstein on the Dollar,” March 28, 2008. http://www.eurointelligence.com/article.581+M50b4edc2d93.0.html (Accessed April 2, 2008)

Martin Feldstein, “The Case for a Competitive Dollar,” National Bureau of Economic Research, http://www.nber.org/feldstein/siepr319.pdf (Accessed March 27, 2008)

The all-time high was reached in 2005 when the US current account was close to US$800 billion, almost 7% of US Gross Domestic Product (http://www.epi.org/content.cfm/webfeat_econindicators_capict_20060616)

Pax-Europa, “Eurozone Overtakes US Economy,” http://pax-europa.com/?p=91 (Accessed April 11, 2008)

Alain Faujas, “Selon Bruxelles, la zona euro commence a être ébranlée,” Le Monde, March 28, 2008. “Le bon temps économiques est terminé” “La zone euro commence a être ébranlée”

EU Business, “EU Cuts 2008 Eurozone Growth Forecast to 2.2 per cent,” November 09, 2007. http://www.eubusiness.com/Finance/1194607021.0/ (Accessed March 27, 2008)

BBC News, “EU Cuts 2008 Eurozone Growth Rate,” February 21, 2008. http://news.bbc.co.uk/2/hi/business/7257119.stm (Accessed March 27, 2008)

“Je ne dire pas que le pire est derrière nous.” Reuters, ¨ ECB Is Worried About Excessive Currency Moves,¨ CNBC, March 10, 2008. http://www.cnbc.com/id/23558019/ (Accessed March 10, 2008)

Sebastian Dullien and Daniela Schwarzer, “The Euro’s Strength: An issue for the EU Summit,” March 9, 2008. http://www.euro-area.org/blog/?p=128 (Accessed March 22, 2008)

Ralph Atkins, “Exports Rise Boosts German Economy,” The Financial Times, March 11, 2008. http://www.ft.com/cms/s/0/46fe8444-ef0b-11dc-97ec-0000779fd2ac.html (Accessed March 11, 2008)

Ralph Atkins, “Exports Rise Boosts German Economy,” The Financial Times, March 11, 2008. http://www.ft.com/cms/s/0/46fe8444-ef0b-11dc-97ec-0000779fd2ac.html (Accessed March 11, 2008)

Charles Wyplosz, “Bonne nouvelle: l’euro est fort!,” Telos, March 28, 2008. http://www.telos-eu.com/fr/article/bonne_nouvelle_l_euro_est_fort (Accessed April 3, 2008).

Wolfgang Munchau, “This Crisis Could Bring the Euro Centre-Stage,” The Financial Times, March 23, 2008. http://us.ft.com/ftgateway/superpage.ft?news_id=fto032320081132135095&page=2 (Accessed April 3, 2008)

Benjamin J. Cohen, “Toward a Leaderless Currency System,” March 2008. http://www.polsci.ucsb.edu/faculty/cohen/working/pdfs/Dollar_challengers_rev2.pdf (Access April 1, 2008)

Haydee Leon Moya, “A Space for Diversity of Opinions,” Digital Granma International, http://www.granma.cu/ingles/2008/marzo/mar18/11economistas-i.html. (Accessed April 2, 2008)

Barry Eichengreen and Marc Flandreau, “Why the Euro is Unlikely to Eclipse the Dollar,” The Financial Times, April 2, 2008. http://www.ft.com/cms/s/0/14049bf2-00b1-11dd-a0c5-000077b07658.html (Accessed April 2, 2008)

David Hale, “Where the Dollar’s Decline Is Taking the World,” The Financial Times, November 23, 2007

Sebastian Abbot, “OPEC leaders debating replacement of U.S. dollar,” The Miami Herald, November 17, 2007

“What to Do About Opec’s Dollars,” The Financial Times, November 20, 2007

The Financial Times, “Looming Dangers for the Dollar,” Editorial, March 31, 2008. http://www.ft.com/cms/s/0/1ee9914a-ff4d-11dc-b556-000077b07658.html (Accessed April 1, 2008)

Ralph Atkins, “ Dollar’s Role Is Safe from Euro Challenge,” The Financial Times, November 23, 2007

Charles Wyplosz, “The Fed Is Delaying the Day of Reckoning,” The Financial Times, march 12, 2008. http://www.ft.com/cms/s/0/5e9f14d6-f039-11dc-ba7c-0000779fd2ac,s01=1.html (Accessed April 1, 2008)

Daniel Gros, “Different Dilemmas in America and the Eurozone,” The Financial Times, March 25, 2008. (http://www.ft.com/cms/s/0/e995dd30-fa8a-11dc-aa46-000077b07658.html?nclick_check=1 (Accessed April 4, 2008).

Daniel Gros, “Different Dilemmas in America and the Eurozone,” The Financial Times, March 25, 2008. (http://www.ft.com/cms/s/0/e995dd30-fa8a-11dc-aa46-000077b07658.html?nclick_check=1 (Accessed April 4, 2008).

John Authers, “The Short View: Wall St and Fed,” March 18, 2008. http://www.ft.com/cms/s/0/0393ce94-f532-11dc-a21b-000077b07658.html (Accessed March, 22, 2008)

Eurointelligence, “Dragui’s List,” March 2, 2008. http://www.eurointelligence.com/article.581+M56925be519b.0.html (Accessed April 3, 2008)

M. Martínez, ¨China dispara al euro al borde de 1,50 dólares,¨ Expansión, 8 Noviembre 2007.

Milton Friedman, “The Island of Money,” in Money Mischief: Episodes in Monetary History, New York: Harcourt Brace Jovanovich, 1992.