Euro and US dollar exchange dynamics

¶ … economic history has shown that the U.S. dollar has fallen from its previously held top position in the world market. This fall has affected all other existing currencies, and particularly the Euro.

Many hold that the major problem entailed in the current-account deficit of the United States began with Richard Nixon removing the U.S. currency from the gold standard in 1971. The oil supply of the world was then traded in U.S. fiat dollars, and the dollar began its rise as the dominant currency in the world. Basically, the United States was free to print dollars, and this influenced other countries and their economies, as their dollar reserves had to be vast in order to pay off IMF debts and purchase energy. In contrast, the United States was able to import large amounts of goods and services at fairly low costs.

The Euro however became a serious rival to the dollar when Iraq became the first OPEC nation to sell its oil for Euros in November 2000. The result is that the Euro increased in value while the dollar began to decline.

According to some, this is the reason why the United States invaded Iraq to Americanize the government in this country -- to force the country to once again use the dollar instead of the Euro. Further OPEC movement towards the Euro has also been said to be curtailed by this move. This is however somewhat desperate on the part of a country whose trade deficit is the size of that belonging to the United States.

It is said that the dollar is currently overvalued by at least 40%, resulting in the above-mentioned deficit. In contrast, the Euro is not subject to large deficits, has higher interest rates, and an increasing share of world trade. The new currency is obviously establishing itself as one of the major monetary units in the world, and consumers are increasingly given a choice in the matter, whereas previously only the dollar was recognized as having major value in world trade. Thus other nations can exercise financial leverage against the United States without fear of damage to the countries involved or indeed the financial system.

The dollar has been the basis for American economic power. Their invasion of Iraq is seen by some as simply a desperate attempt to gain some leverage for world domination in the face of the dollar's decline. The expense of this, like the expense of many other American activities, is unsustainable in the face of the power gained by the rest of the world in general and the Euro in particular. The increased power of the Euro furthermore serves as a threat to American world domination, as other nations now have the power to topple the economy of the country without fear.

While the dollar's decline has been fairly steady but minor in the past, more recent declines have been more extreme. Indeed, the currency has come to record lows against major currencies, and especially against the Euro. The reason for this is cited as the U.S. current-account deficit. This deficit has been of concern for international circles, as the U.S. dollar, being the major currency of trade in the world, affects all other currencies.

One affecting factor is the so-called unsustainable growth shown in the U.S. economy during the 1990s. This was halted by falls in investment, including share indices such as NASDAQ, which fell after 20 years of advances. The legacies of mismanagement and scandal brought into the open with regard to corporate America was offset by a lack of retrenchment in domestic demand. The result of Federal Reserve's approach combined with homeowners tapping into home equity is that domestic demand remained positive, and consequently the recession was particularly mild.

Additionally, the recession, being mild, did not influence the size of the current-account deficit. Because the recession was so mild, the general shopping habits of United States consumers changed little. Furthermore the dollar strengthened during the uncertainty in the aftermath of the 9/11 attacks. The current-account deficit however has begun to become a crisis for the U.S. authorities to fund it, and thus the dollar began its fall. The current situation is that it has reached a record low against the Euro, and also against other major European currencies. The major influencing factor here is the above-mentioned deficit.

The situation of the falling dollar is a major influencing factor for Europe. As the dollar fell, the Euro and other currencies began to experience gains against the American currency. Being the single major world currency as opposed to the dollar, the major beneficiary is the Euro.