Dollar or Euro?

What is happening with the euro and the dollar? In a sad moment for the euro rate has dropped it to about 84 cents. Today the Euro is already worth $ 1.07-$ 1.08. This is significantly lower than the starting rate of the single currency, which in January 1999, $ 1.17. But in any case, the current growth rate of the Euro could not surprising, given that painful condition in which there is the economy of the euro.

In the third quarter of last year (this is the most recent period for which complete data are available) the U.S. economy grew by 1%. During the same period, the three largest euro area economies have shown far less impressive results: German economy grew by only 0.2%, and the economy of France and Italy - at 0.3% each.

What then can explain the fall in the dollar? The main reason for this phenomenon lies in the existence of a huge U.S. trade deficit. Currently, the deficit is about half a trillion dollars, equivalent to 5% of U.S. GDP.

This deficit must be financed, ie, the aggregate amount of capital poured into the American economy needs to be greater than the amount of capital derived from the United States to other countries. During the economic boom of the 1990's this condition is easily done: investors from all over the world have sought to make the rapid growth of the U.S. stock market.

However, during the boom had ended two years ago, and today the interest of foreigners to acquire American companies and their shares fell significantly. Today, the dollar decline may be caused by even the outflow of foreign investment: it is simply slow the rate of capital in the American economy from the outside.

However, the fall in the U.S. currency has enough going on slowly. This is because today, investors do not have enough profitable opportunities for alternative investments. The euro-zone economy is growing too slow, as the Japanese economy has not yet been able to get out of depression, in which it is already over a decade. As for emerging markets, but today they seem to most investors are too risky. Nevertheless, despite the lack of alternatives, a downward trend in the dollar is clear: as economists have long warned, so many years the trade deficit could not cause a reduction in the cost of American currency.

Recently, this process is further accelerated because of the fear of war. In the case of the war, United States, obviously, will lead the anti-coalition, which, according to investors, making Washington the most likely target of retaliatory attacks, Saddam Hussein. Although the most likely economic consequences of this hypothetical attack would not be fatal, any outbreak of terror can strike at the confidence of consumers and producers in the United States.

Under normal circumstances, the U.S. trade deficit problem could be solved by itself in the devaluation of the dollar. In the case of imported goods would become more expensive for the residents of the United States, forcing them to buy more American-made goods. In turn, consumers in other countries, too, have a further excuse to buy more American goods. However, the current economic weakness of Japan and Western Europe do not allow them to increase its imports from the United States. As a result, despite the fall in the dollar, the underlying trade deficit remains.

This potentially could adversely affect the position of the American economy. Smooth, soft fall of the dollar would be passed relatively painlessly. In addition, because oil prices are calculated in dollars, a devaluation of American currency would be even useful for some sectors of the economy. However, a sharp full dollar will lead to the collapse of the devastating consequences for financial markets, the profits of American companies and, indirectly, for the American labor market.