US Dollar Vs. Euro in Value

The euro, introduced in 2002, has already become the second-most traded currency behind the dollar. As of November 2008, the euro currency had the largest combined value of cash in world circulation. Since 2002, the dollar has generally fallen in value compared to the euro.

The U.S. dollar, due to relative deflation, has become weaker when compared to the Euro

Introduction of the Euro

Various euro coins and bills

Evidence suggests that the euro has made Europe more economically stable. Trade has increased, investment has increased and the introduction of the euro has reduced exchange rate risk (and speculation on currencies). In addition, the introduction of the euro decreased the interest rates of most member countries. Even Europe's tourism has seen a boon from the introduction of the euro.

Introduction of the Euro and the Value of a Dollar

After the introduction of the euro, the U.S. dollar has steadily decreased in value, or "depreciated" relative to the euro. In 2002, one euro could purchase between 0.98 and 1.17 U.S. dollars. By 2004, one euro could purchase between $1.20 and $1.30. By 2009, the average exchange rate was 1 euro to between $1.23 and $1.49.

Depreciation of the Dollar

Various economic thinkers have analyzed the reasons for the dollar's relative decline against the euro, and against world currencies generally. First, the rising U.S. budget and trade deficits were and continue to be negative throughout this period--which weakens the dollar. Second, economists speculate that the dollar's fall might be partly because other countries are decreasingly using the dollar as a reserve currency.

Developments after 2008

The financial crisis of 2008 affected many businesses

The financial crisis of 2008 severely affected the world's economy. The U.S. dollar gained value during this time against most other world currencies. The rate fluctuated from roughly $1.50/euro in summer 2008 to $1.20/euro by November. One possible reason for this was the U.S. dollar's historical role as a safe monetary unit. However, after the spring of 2009, the dollar once again weakened against the euro.

Considerations/Misconceptions

The concepts of appreciation and depreciation sometimes are confusing. When a currency appreciates it means that it costs less to buy that currency with other world currencies. Thus, $1.50/euro to $1.30/euro is an appreciation of the dollar (since it takes less dollars to buy a single euro). The falling numbers actually represent increases in value. Conversely, a rate change from $1.30/euro back to $1.50/euro is a depreciation (a loss in value), since it takes more dollars to buy a single euro.

References

• The Real Effects of the Euro: Evidence from Corporate Investments; Bris, A., Koskinen, Y, Nilsson, M;
• The Euro Changeover and Its Effects on Price Transparency and Inflation; Dziuda, W., Mastrobuoni, G; Journal of Money, Credit, and Banking, Vol41N1, p101-129; 2009
• FXHistory: Historical Currency Exchange Rates

Resources

• European Central Bank: Exchange Information (USD v. EUR)