A declining Euro ?

The question of where the global currency exchange rates are headed for is one which has a more than casual interest to most corporates these days. The exchange rates between the American dollar and the European Euro is especially interesting, which are indicative of the two of the larger global economies.

Arguments for a weaker Euro:

- Currently the Euro is fairly overvalued relative to the US dollar based on purchasing power parity (PPP). The tendency is for the PPP to equalize in an efficient marketplace, bringing down the value of the Euro.

- The Euro is at an all time high now versus the dollar.

- With less developed countries joining EU in the future, the union will have to undertake more infrastructure and services development work in the newer countries to bring it up to par with the rest of EU, thus weakening the EU economy in general and hence the Euro.

- There are already reports indicating EU is already n the lowest growth periods in its history. Is it going towards a recession?


Arguments for a falling US Dollar

- The economic crises in the USA, related to mortgages, credit card industry are far from over, this could result in the Fed reducing interest rates further.

- There may be a policy decision to let the dollar fall in value to encourage more exports and discourage imports, considering the trade deficit the US is currently in.

- As the Euro gains more popularity, forex reserves held by countries may shift more to Euros instead of Dollars, which could strengthen the Euro.

On the whole I feel, the natural tendency may be for the Euro to gain further against the dollar on a shorter time frame. However the EU central banks may intervene to lower the value of the Euro, for their own reasons. For one a weaker Euro will encourage more exports from EU, and may be better for the EU economy. It would also encourage more foreign direct investment in EU.