The question as to which currency is more stable between the euro and the dollar is a controversial one. On the one hand many foreign companies are thinking of keeping their funds in euros, thus reflecting the euro as a more stable currency. On the other hand others consider the dollar as a more stable currency. In the final analysis the dollar may be considered a more stable currency as opposed to the euro. A number of reasons can be advanced for considering the dollar a more stable currency than the euro:
Firstly, the dollar has served as the pillar of the international financial system since the collapse of the fixed parity system in the early 1970s. It has also been the major world currency since the British pound began to lose influence and strength in the 1930s and 1940s. (Kaikati, 1999).
This made the United States to benefit considerably from the dollar’s leadership in the international financial system enabling her to attract large amounts of capital and to finance borrowing needs at lower interest rates than purely domestic demand for dollar assets would have allowed (Kaikati, 1999).
Argentina is an economic, financial, political and social tragedy. The country declined from being the 10 th wealthiest nation to the 36 th wealthiest in 1998. Argentina is the only wealthy country to experience so great a reversal in recent history. Currently in a financial crisis, Argentina faces fewer prospects for positive economic growth in the future. Poor economic policies and political ...
Secondly, Investors have long perceived the dollar as a safe haven enabling the United States to refinance its huge federal budget deficits of the 1980s and early 1990s with money from abroad especially from Japan (Jack G, 1999).
The recent Asian financial crises sent a flood of money into the United States as investors looked for a safe place to keep their money (Kaikati, 1999).This resulted to lower interest rates, mortgage refinancing and low housing cost for Many Americans (Kaikati, 1999).
Thirdly, the euro’s introduction in January 1999 provoked widespread sentiment among economic analysts that the euro would appreciate moderately against the dollar. This reflected the status of the new currency as a credible rival to the dollar (Kaikati, 1999).
The size of the eurozone economy was considered by many as a major factor for the euro to challenge the dollar. For example, the Eurozone economy matches the U.S. economy in size and in share of world trade; it has a combined annual output of 62.5 trillion dollars, against 8.1trillion dollars for the United States. Also, extending the Eurozone to all 15-member countries of the European Monetary Union (EMU) would have made the Eurozone the largest economy with a share of international trade outside the eurozone of 22% as opposed to 19.3% for the United States of America (Kaikati, 1999).
As investors and central banks began shifting their portfolios into the new currency, stakes became high that the euro would appreciate against the dollar. (Neaime & Paschakis, 2002).
The euro was launched at an initial value of €1=$1.17 in 1999 (Simon & John, 2002).
Conversely, the euro’s value fell from its value of €1=$1.1877 to €1=$0.82 in October 2000, representing a drop of 35% from its launch rate (Simon & John, 2002).
From December 2000 onward, the currency started gaining against the dollar and by early January 2001 the euro had risen to about €1=$0.96. (Neaime & Paschakis, 2002).
However, its value subsequently dropped to a range between €1=$0.882 and €1=$0.83 (Neaime & Paschakis, 2002).
Fourthly, many European Countries are still to perform the necessary restructuring of their economies without which, European economies will be unable to witness the kind of growth that would attract strong investor demand for the euro. According to one currency analyst, “The U.S economy is considered flexible, dynamic and productive; that contrasts with a view of Europe as a region burdened with high taxes, labor and product rigidities and bloated bureaucracies” (Shapiro, 2005).
... the United States, the EU were respectively 4.0% and 2.2%. As a consequence of the booming of Internet industry, the US economy ... in the European economy. Table 1: ECU or Euro Exchange Rate 1996 1997 1998 1999 2000 US Dollar 1.270 1.134 1.121 ... investors have been hesitant to hold euro-denominated assets, preferring instead to hold US dollars. Accordingly, this phenomenon contributed that the euro ...
Finally, the euro rose briefly after the terrorists’ attacks on the United States on September 11, 2001, since investors perceived the United States as a relatively riskier place to invest in. However, it soon became clear that the Euro Zone was worse than previously thought as investors began shifting their portfolios into dollars. This led to a fall in the value of the euro.(Shapiro, 2005).
From the foregoing, looking a few years ahead, I will consider the U.S dollar a more stable currency and therefore advise investors and foreign companies to shift their portfolios from euro-denominated assets to dollar-denominated ones.
Kaikaita, J.G. (1999).
The euro versus the U.S. dollar: An overview. Journal of World Business, 34(2).
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Mussa, M. (2005).
The euro and the dollar 6 years after creation. Journal of Policy Modeling, 27, 445-454.
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Muller, A., Verschoor, F.C. (2005).
Foreign exchange exposure: A survey and suggestions. Journal of Multinational Financial Management, 26, 262. Retrieved, February 9, 2005 from ScienceDirect Database.
Neaime, S., Paschakis J. (2002).
The future of the dollar-euro exchange rate. The North American Journal of Economics and Finance, 13, 56-71. Retrieved, February 9, 2005 from ScienceDirect Database.
Shapiro, A.C. (2003).
Multinational Financial Management (7th ed.).