Aby June 25th, 2007
The exchange rate of a Euro has been pegged 1.3415 US Dollars as of today, 25th of June 2007. While we have been witnessing the gradual decline of the dollar against the Euro and other global currencies since the US war on Iraq on 2003, the world is still wondering if the Dollar loses out to Euro a a global transaction medium for trade and reserves.
The Predators - An artist’s rendition of the global Dollar vs Euro War
Developing countries like China, Japan, etc. try to keep the dollar high against their currency to maintain competitiveness in global trade and export. It helps them provide services and products at a lower rate than the high exchange rate nations could. On another side, European Union’s Central Bank is somewhat reluctant to let the Euro rise too fast as it could reduce their export business and drag down the fast growing European economy. Other countries are pitting to keep the dollar high because a reduction of dollar would reduce their capital assets which are in US Dollar reserves. These factors put the dollar at a critical juncture as many countries and continents have vested interests in keeping the rate of dollar at a high.
Euro’s main problem lately is the economic diversity of the European Union. While we have wealthy countries in Western Europe like France, Germany and Netherlands; the Eastern Europe has mostly poor countries like Romania, Estonia, etc. The inflation and price index vary widely between different countries which puts Euro as a one-size-fits-all currency in a financially weak spot. In the area of economic growth there have been issues as well, with Germany having large surpluses of Euro due to its economic growth while France and Spain are growing at a snail’s pace despite their stable economies.
The dollar is not free of problems either. The long drawn war in Iraq had taken its toll on the US economy with recession of the dollar against the globally uniform ‘Gold Standard’. A lot of countries like those in West Asia and Europe are pulling out their dollar reserves and moving to Euro. Investors are now converting to Euro bonds from the Dollar at a slow but steady rate. The Euro is rising against the Dollar in foreign exchange rates despite all the ‘push’ for the Dollar. On April 27, 2007 the value of a Euro sky-rocketed to a high of 1.3688 Dollars. According to IMF’s COFER (Currency Composition of Official Foreign Exchange Reserves) data, the share of Euro in global reserves has increased from 14% in the first quarter of 1999 to 17.08% in the 4th quarter of 2006. The share of US dollar dropped from 54% to 42.88% in the same period.
It seems like in the long run, the might of the Euro could eat away at the dollar - bye and bye like Mozilla Firefox hurt the Internet Explorer browser market. Or perhaps, better still the world will have two major currency options to choose from much like diversifying stock options.