The euro has fallen 12 per cent against the dollar since December, leading some to question the euro’s value as a global reserve currency. Yet as the following chart from Clemens Kownatzki shows, such fears are overblown.
The data show the euro-dollar relationship all the way back to 1972, using a currency basket to derive values prior to 1999. As one can see, since the end of Bretton Woods, European currencies have gradually strengthened against the dollar and the long-term trend is up.
Even if the panic continues and the euro troughs at 1.1 or even at parity with the dollar, this would still imply an upwards historical trendline. Given Europe’s low inflation, lower budget deficits and more robust trade figures, this trend is likely to continue over the decade, even if the short-term trend is clearly down.
#1 by CrisisMaven on April 1, 2010 - 5:40 pm
You seem a little mistaken … not the synthetic Euro has rsen, the dollar has fallen ever since Nixon took it off the gold standard. That is no wonder. However, while your calculation as to the “currency basket” prior to the Euro’s inception is probably correct, the Euro itself was and is so misconstrued that it is now on the verge of collapse and that will lead to either a flight to the dollar again, or, if investors have any sense, to gold. So whoever then holds Euros will be short-changed by some degree as the replacing national currencies will surely not be changed back at the 2001 ratio but each seceding state will try to cast off some of its debt in the bargain. The same would happen if then the US’ hand was forced to abandon the dollar which is equally likely seeing the exponential growth of its money “supply”.
#2 by Val on April 3, 2010 - 11:17 pm
Sounds like a comment from those same people that kept reassuring everybody there is no housing bubble, nothing is wrong with the financial market, etc. There were similar trends in the US housing market too for some periods of time…
#3 by Roberto Foa on April 14, 2010 - 2:28 am
It is true that the dollar index, which measures the value of the dollar against a weighted basket of currencies from around the world, has fallen over time. In March 1973 it was 100 and today it is around 80. Yet European currencies have risen, not simply against the dollar, but against most other monies: thus for example by 2003, when the dollar index stood back at 100, the euro stood well above its 1973 dollar value, due to appreciation against the other components of the index.
As for gold, it is quite likely that the price will eventually increase over time relative to paper currencies; but this is not the question central banks face when deciding how to allocate reserves. Because gold has no yield, in order to justify holding it, the annual increase in its price has to be higher than the yield from holding sovereign debt. That is currently 3-4 per cent in most western countries. It is worth pointing out that even after the latest rally in gold prices, since the mid-1970s, gold has underperformed sovereign bonds.
Finally – my point here concerns central banks who decide how to allocate reserves over very long periods, and not individual investors. As an individual that benefits from short-term capital mobility, it would be prudent to hedge against the possibility of further falls in the euro during the following several months to years.
#4 by Arnaud Jasperse on April 16, 2010 - 2:33 pm
You gotta wonder where it all ends…
It is unlikely that any nation joining the EU in the future will be able to negotiate an opt-out like the Danes and Brits had (except maybe Switzerland), or fiddle with the rules like Sweden does…
As it stands, the UK would not even be allowed in the Euro due to its massive debt (and I mean Greece-like levels)…
But by Januari 1st 2016, we’ll likely see the Baltic states, Romania, Bulgaria, Poland and maybe even Croatia, Denmark and Sweden join the Eurozone…
Thats 100 million more people that will use the currency, not to mention the current debate on adding more tools to that “common toolbox” to keep the Euro safe from crises…
If the cards are played right, then in the long term, you can see why the Euro is not going to fail…
Enter common economic policy please…
#5 by Currency Trading Center on July 8, 2010 - 12:07 am
The initiative taken for the concern is very serious and need an attention of every one. This is the concern which exists in the society and needs to be eliminated from the society as soon as possible.Thanks to be good.
Currency Trading Center
******************************
Shrely Mess
#6 by Currency Trading Center on July 8, 2010 - 12:19 am
This is really add for money problem.The initiative taken for the concern is very serious and need an attention of every one.
Currency Trading Center
****************************
Shrely Mess
#7 by Joe Noory on July 15, 2010 - 3:18 pm
It ends at Purchasing Power Parity, which is to say $1,17. Nothing other than wave levels up, or a wave levels down.
The very fact that it previously took $1,50 to purchase $1,17 worth of parity should tell you something about the sclerotic concept of empire-lite state power has on constructing far more poverty and mediocrity than it alleviates.