The US dollar and the euro – Deus Ex Machina: The dollar may be our currency, but it’s your problem. EUMA Papers, Vol.5, No.9 April 2008

Lorca-Susino, Maria. (2008) The US dollar and the euro – Deus Ex Machina: The dollar may be our currency, but it’s your problem. EUMA Papers, Vol.5, No.9 April 2008. [Policy Paper]

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Abstract

[Introduction]. Until the 19th and mid-20th centuries, economic theory explained that the economic status of a country was represented by the strength of its currency.2 This strength is measured by the exchange rate of one currency vis-á-vis another currency, a “zero-sum” game in which one currency gains what the other loses. In fact, during the 19th century, the strength of the Pound Sterling facilitated Britain’s global hegemonic political and economic power known as the Pax Britanica. During the 20th century, the strength of the US dollar represented both the economic and political hegemony of the US around the world known as the Pax Americana. Nowadays, the weakness of the US dollar is making specialists wonder if we are witnessing the end of Pax Americana and the beginning of something else, possibly a Pax Europea, led by the strength of the euro. This is the argument surrounding the current behaviour of the US$-€ exchange rate and its effect on the economic performance of these two economic blocs. While the current exchange rate between the US dollar and the euro has been considered a blessing for the US, it has become a matter of concern for most Eurozone countries. In fact, we are witnessing an unprecedented scenario where the country with a weak currency is actually pleased and the group of countries with a strong currency is worried. The strength of the euro is becoming irritating for the Eurozone and, nevertheless, the weakness of the US dollar is also pushing it to the brink of losing its status as a global currency. This exchange rate debate is accompanied by another debate concerning how the latest monetary policy actions taken by the US and Eurozone monetary authorities3, aimed at solving current economic imbalances, are affecting the US$-€ exchange rate. Scholars, economists, and politicians argue that these monetary policies seem unable to solve today’s economic problems in the EU as well as in the Eurozone, but are having a tremendous impact on the US$-€ exchange rate. This paper will explain in layman’s terms the relationship (or lack thereof) between two of today’s most important economic issues: the US dollar and euro exchange rate, and the monetary policy behind it.

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