Last Wednesday, the Euro dropped to a 12 year low of $1.05 and is expected to continue dropping. This means that the dollar is on the rise and is expected to surpass the Euro for the first time since the financial recession. A strong dollar is good for any tourists but at the same time this is bad news for the United States’ exporters. It also resulted in the decline of stocks because several multinational corporations rely on foreign investment to expand sales.
The reason the dollar is on the rise is that the economy is much stronger. The European markets have been gradually falling so this decline was imminent. Since the economy is doing well the banks will raise interest rates. Since the U.S. economy is doing well European investors will invest in U.S. Treasury bonds. On the other hand, the European central bank will lower interest rates to encourage investment in the economy to revive the failing standards.
A bond bought in the U.S. with the same maturity as a European bond will have a higher return in interest rates. Since the monetary policy of the U.S. and Europe is going in opposite directions the gaps in the value of both currencies will continue to widen indefinitely. By the end of 2017, it is expected that the Euro will fall to 85 cents.
This event has been termed as a kind of currency war. If the U.S. doesn’t act and lets the dollar go up too much in value it can be detrimental to domestic exporters. This situation is a perfect example of how a strong dollar can also be a weakness. In order to bring this into control the U.S. must continue to alter their interest rates and consider how European investment will impact the economy.