Since the November 2008 G-20 meeting that was held in Washington, financial turbulence has really shocked the world economy (Li, 2016). The stability of the U.S dollar against the Euro can be compared to the dog that did not even once in its life history bark. Reflecting back, it is easy for an individual to understand what a "weak Euro" implies. Shortly after the Euro was introduced in 1999, the Euro performed poorly for consecutive two years. Provided the uncertainty in the euro zone, the stability of the Euro against the US dollar seems to be unlikely yet it was not the case as the performance of the European currency surpassed that of the U.S dollar (Haynes and Haynes, 2016). For several years, the world economy has been shaken by a threat of a collapse of the Euro. The paper indents to examine the exchange-traded fund (ETF) for the Euro in comparison the U.S dollar for over a five year period ending with 2010.
The Sovereign debt crisis that hit the European currency has not worsened the perception in the attractiveness of both the euro and the U.S dollar. Since 2006, the intractability of the Southern European deficit, the bad relationship between the sovereigns and the banks, the unending conflict between the creditors and debtors have not contributed to a poor performance of the Euro against the US dollar. For the period of more than five years from 2010, the exchange rate of the euro against the dollar has greatly fluctuated between $1.24 and $1.45, with the European currency standing at an average of more than 12% above its own purchasing power parity (Morana, 2016).
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The major question that keeps ringing among the macroeconomists is why the European currency had to fluctuate in such narrow rate during the sovereign debt crisis? Despite many challenges in the European zone due to the Great Recession, the European currency continued to be used by the global investors implying that there was no crisis of the European currency (Li, 2016). The Euro continued to be used for trade, and it continued to be used as the world's conventional FOREX reserve instrument. The Great Recession did not in any way change the stability of the European currency against the US dollar as many trade transactions all over the world were succeeded with the help of the Euro (Betz, 2016). The Euro was never established to be a competitor of the U.S dollar, and this explains its stability in the market. Upon its establishment, the European currency became a junior substitute of the dollar by the international monetary bodies, hence explaining its success in the early and the mid-2000s.
It appears that the Euro is overvalued when compared to the US dollar because the exchange rate is averaged at 1.325 dollars. The changing perception the attractiveness of both the U.S dollar and the Euro has followed the same trend since 2005 hence explaining the continued stability of the Euro against the U.S dollar even during the time of the Great Recession. The euro-dollar stability usually is an illustration of the perception of the attractiveness of both the dollar and the euro (Haynes and Haynes, 2016). Since the dollar and the Euro are used as compliments in the trade market as the trading currency, the rise and the fall of the Euro during the Great Recession also influenced the dollar in similar capacity hence the continued stability of the euro against the dollar. The Eurozone crisis was termed as political and financial hence it did not have a significant impact on the world performance of the euro as the euro was majorly used as an exchange tool the same way as the dollar (Morana, 2016). This is to say that the perception of the attractiveness of the European currency did not change amongst the users, hence its continued stability in the market even during the time Europe was facing a Sovereign debt crisis.
Conclusion
In conclusion, the euro has been for a long time a world trading currency just as the U.S dollar. Since its inception, the attractiveness of the euro has been similar to that of the U.S dollar, hence explaining its stability against the dollar. Despite the fact that the Great Recession affected the performance of the Euro in the world market, the U.S dollar also was affected in the same way as the two are used jointly in the world market. The Euro is normally overvalued by the world traders, hence an indication as it is valued at an average of 1.325 dollars. For more than five years up to 2010, the performance of the euro against the dollar has been interdependent hence the explanation as to why the euro is valued more than the U.S dollar.
References
Betz, F. (2016). Why ‘Austerity’Failed in Greece: Testing the Validity of Macro-Economic Models. In Stability in International Finance (pp. 79-94). Springer International Publishing.
Haynes, P., & Haynes, J. (2016). Convergence and Heterogeneity in Euro Based Economies: Stability and Dynamics. Economies , 4 (3), 16.
Li, R. (2016). Proposals for Reforming the International Monetary System. In Reform of the International Monetary System and Internationalization of the Renminbi (pp. 139-146).
Morana, C. (2016). The US Dollar/Euro Exchange Rate: Structural Modeling and Forecasting During the Recent Financial Crises. Journal of Forecasting , 6 (6): 67-72.
