The American dollar and the euro are two of the most important currencies in the world today. The relative strengths of these two currencies help to drive the global economy and can influence other currencies as well. If you understand the relationship between the euro and the dollar, you can begin to understand economic trends on a global scale.
The euro is the official currency of the European Union and is used as the official currency of Austria, Belgium, Finland, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal and Spain. The American dollar is the official currency of the United States, which controls the printing and trade of the dollar. The U.S. dollar is also the official currency of Ecuador, El Salvador, East Timor and the Trust Territory of the Pacific Islands (Palau, Micronesia and the Marshall Islands).
In the 1940s, a fixed exchange rate for all world currencies was established. At the center of this exchange rate was the American dollar. All other currencies at the time were exchanged based on the value of the dollar. In 1971 and 1973, changes were made to this system, due to instability brought on by the fluctuating value of the U.S. dollar. The new method of currency exchange has led to increased speculation over the past 30 years, with currencies allowed to fluctuate independently, based on market speculation.
With the establishment of the European Central Bank in 1998 and the introduction of the euro in 1999, the international exchange market was further liberalized. The Euro’s value, at its introduction, was slightly higher than that of the U.S. dollar. That value dipped soon after, with the value of the euro falling below that of the dollar early in 2000. The euro’s value remained below that of the dollar until the middle of 2002, reaching its lowest values in 2000 and 2001. Since the beginning of 2003, the euro has remained stronger than the American dollar, although the exact value of each currency fluctuates on a daily basis.
Currencies around the world are fixed in value in relation to the euro and the U.S. dollar. Countries with currency tied to the American dollar include Panama, Bermuda, the Bahamas, Argentina, Lebanon and Hong Kong, while 26 countries tie their currency to the euro, including Bulgaria, Denmark, Lithuania, Latvia, Chad and Morocco. Any change in either the euro or the dollar has a ripple effect in every country whose currency is pegged to them. This effect continues to spread among the trading partners of the countries in question.
Predicting the performance of the euro vs. the American dollar is tricky, with the relative values dependent on the global economy, industrial performance and currency exchange speculation. Despite this, economists are able to make some predictions on relative values. The euro is, in the fall of 2009, stronger than the American dollar, with one euro equal to 1.46 dollars. The euro is expected to remain stronger than the American dollar at least through 2010.