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The impact of banking and sovereign debt crisis risk in the eurozone on the euro/US dollar exchange rate


  • Stefan Eichler


I study the impact of financial crisis risk in the eurozone on the euro/US dollar exchange rate. Using daily data from 3 July 2006 to 30 September 2010, I find that the euro depreciates against the US dollar when banking or sovereign debt crisis risk increases in the eurozone. While the external value of the euro is more sensitive to changes in sovereign debt crisis risk in vulnerable member countries than in stable member countries, the impact of banking crisis risk is similar for both country blocs. Moreover, rising default risk of medium and large eurozone banks leads to a depreciation of the euro while small banks’ default risk has no significant impact, showing the relevance of systemically important banks with regards to the exchange rate.

Suggested Citation

  • Stefan Eichler, 2012. "The impact of banking and sovereign debt crisis risk in the eurozone on the euro/US dollar exchange rate," Applied Financial Economics, Taylor & Francis Journals, vol. 22(15), pages 1215-1232, August.
  • Handle: RePEc:taf:apfiec:v:22:y:2012:i:15:p:1215-1232
    DOI: 10.1080/09603107.2011.646064

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    References listed on IDEAS

    1. Paul De Grauwe, 2010. "The Financial Crisis and the Future of the Eurozone," Bruges European Economic Policy Briefings 21, European Economic Studies Department, College of Europe.
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    Cited by:

    1. Ludwig, Alexander, 2014. "A unified approach to investigate pure and wake-up-call contagion: Evidence from the Eurozone's first financial crisis," Journal of International Money and Finance, Elsevier, vol. 48(PA), pages 125-146.

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