Added: 02/16/2006 |
Euros exchange rate vis-a-vis other currencies is characterized by strong fluctuationsThe euro (symbol: ?; banking code: EUR) is the single currency of the following twelve European Union member states: Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal and Spain; collectively also known as the eurozone.
The euro is the official currency of the European Union. It was introduced to world financial markets in 1999 and launched as a currency in 2002. The euro is strongly advancing both economic and political integration between the participating EU member state. All EU member states are eligible to join if they comply to certain monetary requirements.
The euro exchange rates are managed and administered by the European Central Bank (ECB) and the European System of Central Banks (ESCB), composed of the central banks of its member states. As an independent central bank, the ECB is headquartered in Frankfurt, Germany and has sole authority to set monetary policy. The ESCB participates in the printing, minting and distribution of notes and coins in all member states, and the operation of the eurozone payment systems.
One of the implications of the Mundell-Fleming Model is the fact that when an economy combines international capital mobility with monetary autonomy, it cannot maintain a fixed exchange rate (as increasing the money supply would result in a depreciation of the currency). In the years following the Single European Act the EU has liberalized its capital markets, and as the ECB has chosen for monetary autonomy, the regime of the euros exchange rate is flexible or floating. In other words, the ECB has given up the instrument of the euros exchange rate and in general does not intervene on the foreign exchange rate markets. This explains why the euros exchange rate vis-a-vis other currencies is characterized by strong fluctuations. Most notable are the fluctuations of the euro vs. the US dollar, another freely floating currency.
After the introduction of the euro, the euros exchange rate against other currencies, especially the US dollar, declined heavily. At its introduction in 1999, the euro was traded at USD1.18; on 26 October 2000, it fell to an all time low of $0.8228 per euro. It then began what at the time was thought to be a recovery; by the beginning of 2001 it had risen to nearly $0.96. It declined again, although less than previously, reaching a low of $0.8344 on 6 July 2001 before commencing a steady appreciation. In the wake of U.S. corporate scandals, the two currencies reached parity on 15 July 2002, and by the end of 2002 the euro had reached $1.04 as it climbed further.
On 23 May 2003, the euro surpassed its initial ($1.18=?1.00) trading value for the first time. At the end of 2004, it had reached a peak of $1.3668 per euro (?0.7316 per $) as the US dollar fell against all major currencies. At that time, some analysts expected the dollar to continue to fall, a few even suggesting $1.60 per euro by the end of 2005, fuelled by the so called twin deficit of the US accounts. However, the dollar recovered in 2005, rising to $1.18 per euro (?0.85 per $) in July 2005 (and stable throughout the second half of 2005). The fast increase in US interest rates during 2005 had much to do with this trend.
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