Trickle-Down Effects of Changing Value of Euro on US Economy
Historically, the US Dollar had been accepted as the strongest currency and it had no competition at the regional or global level. But inception of Euro changed this unique stature and status enjoyed by USD. With introduction of Euro as the common currency, the European Union became USA’s closest competitor in terms of economic size, performance, indicators and political and economic clout. Over time, value of euro started appreciating and accordingly, Euro/USD exchange rate which is fully floating, started rising. A rising Euro affects the US economy in three ways: directly, indirectly and through a cascading effect caused by an interaction of these direct and indirect influences. This paper attempts to identify and explore the effects of an appreciating Euro on some select economic indicators of the US, both historically and projected. It also establishes the relationship between some of these indicators which are not directly cross-related, by analyzing the impact of the Euro on the economy’s most sensitive economic parameters. Section I briefly touches upon the scope and objective of this paper. Section II introduces the concept of exchange rate, different exchange rate regimes and determinants of exchange rates. Section III views the historical relationship between the Euro/USD exchange rate and the most important macroeconomic indictors of the US economy. Section IV explores the projected impact of potential future Euro/USD exchange rate on the same indictors and explains the linkages. Section V concludes.
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- Guillermo A. Calvo & Carmen M. Reinhart, 2002.
"Fear of Floating,"
The Quarterly Journal of Economics,
Oxford University Press, vol. 117(2), pages 379-408.
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