Essay Example on Effects of Falling Value of Euro

Introduction

Several reasons explain why the euro value has been falling much against the dollar. Given the fact that the interest rates in Europe are falling, the investors are seeking places where they can invest their money where they believe they may be able to realize a better return. Given that money is consistently flowing out of Europe, the value of the euro is significantly depreciating. Having a cheaper euro can help Germany and the entire currency area start selling more exports and increase the anemic growth of the region. In comparison to other parts of the globe, the economy of the United States is growing at a substantial pace, and there are higher bonds of the associated interest rates. Therefore, the United States economy is attracting more investment in the stateside. Several factors are contributing to having a stronger dollar against the euro. The fall of the euro makes dollar value stronger. As a result, there are cheaper imports while making exports expensive. The exports are affected by the supercharged currency which makes it challenging for the exporters to sell their goods abroad. This paper will explain the meaning of the falling value of the euro to the United States exporters and the implications of the fall of the euro to the German counterparts.

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Literature Review

The rate of exchange refers to a system through which different nations utilize in equivocating the value given to a particular currency. The Eurozone and the United States tend to have exchange rates that are floating since the markets usually set the value f money and not by a government (Morana, 2017). The market assists in determining the price given to the value of the euro. When the market is low, then the costs of the euro will be low, and whenever the market is high, then the price of the euro will be high. When the currency is in high demand, the supply by the bank will be high for everyone in the market to use (Hogan & Pearce, 2017). A factor which led to a decrease of the dollar price of the Euros is the European Central Bank which started a stimulus of the competitive economy in the form of the quantitative easing from which it buys bonds off the markets of public-private that are in exchange for cash. As a result, the purchases will start flooding the market with many Euros (Morana, 2017). The Europeans have started buying bonds off public markets which are in exchange for the cash since they understand that the supply will rise whenever they are in high demand.

Given that the Europeans are putting them off the market as well as storing them, it may result in a decrease in price for them on the open market. One major factor which may lead to a rise of the dollar price of Euros is the fact that the dollar is mostly viewed as being a more stable option to euro and it has excellent purchasing power across the globe. The currency of the dollar of the United States is generally viewed as being more valuable than Euro as a result of its strength and stability (Almunia, 2016). When nations prefer adapting dollar currency instead of using the euro currency, Europe is likely to panic and respond by competing with dollar currency utilized in other countries (Hogan & Pearce, 2017). Therefore, Europe would not desire to lose their ability to use their money in different states including America.

General Analysis

The rise of the Euros' dollar price means that there is a fall in the price of the euro of the dollars since the growth of Euros is relative to that of dollars. It takes typically having more dollars for one to purchase one euro. In addition to this, it will take fewer Euros to buy one dollar. This is an indicator that the euro price of the dollars has declined. As a result of the exchange rates, many citizens from other nations which utilize the euro systems may direct the costs of services and goods in other states which trade with one another regarding their equivalent currency exchanges. Given that fiscal federalism and austerity cannot support the entire adjustment burden, the convergence of Europe will need a change in domestic of the surplus nations such as Germany. Berlin will significantly assist in increasing its public wages, spending, and consumption at a rapid rate. This would enable in bridging the gap of competitiveness between deficit and surplus countries. Thus, a fall of the value of the euro would cause a weaker, complementary effect (Morana, 2017). Within Germany, a fall in the amount of euro may affect service industries, unions, and public sectors.

The Euro has continuously depreciated in terms of value against the dollar. Some of the major factors that may lead to the decline of the euro include: having uncertainty that surrounds the Brexit referendum of United Kingdom, the members states who are opting out of unified euro zone, and having slower business activities and little job growth. A fluctuation that may be experienced in the normal exchange rates may affect the economy in several ways. Its impact on the real exchange may influence the expenditures that are incurred by trading partners. The inflation rates of the trading partners also influence the effective exchange rates. The high inflation experienced in euro by United States will mean that there would be a rise in the price levels of dollar as compared to the euro. This normally boosts the exports in Euro zones.

As an exporter from United States to the European Union, the falling value of the euro means that there is less buying power for the European consumers. This causes a decrease in exports by the United States companies to Europe, which includes the largest customers of American goods (Almunia, 2016). In turn, the United States companies will experience a decrease in the realized revenue. The lower taxes are a sign of bad financial status to the investors, whose demands for the shares reduces the value of the stock acquired. Thus, a falling euro commonly causes exportation of less or cutting of production which leads to the development of stocks that are slumping.

United States investors who view their portfolios decline when the euro is weak feel the implications of having a weak euro in different ways. When the euro is found being in a vulnerable position that is relative to the dollar, the imports from Europe cost less. The consumers in the United States see a decrease in prices and can turn to foreign goods, reducing the amount of revenue that is realized by American companies (Hogan & Pearce, 2017). The Americans who make several trips to Europe see their money buying more when the euro is weak. This may not result in bolstering of the local tourism industry when the tourists decide to visit foreign countries in Europe and spend their money away from home. Thus, in a scenario whereby the value of euro falls, the winners are the importers while the losers are the exporters.

Conclusion

In conclusion, the depreciation in the value of Euro mainly reflects the significant weakness that is experienced in Euro-zone. A fall in the value of Euro will assist in the making of the European Union goods and services become relatively cheaper hence enhancing exports, manufacturing and tourism industry in Euro-zone. Consequently having a stronger dollar will hinder the United States recovery. The fall of the value of the euro will make the dollar stronger hence making the United States exporters face financial difficulties as the exports will have reduced demand and will be more expensive.

References

Almunia, J. (2016). Seven years with the Euro. In TheEURuro and the Dollar in a Globalized Economy (pp. 31-36). Routledge.

Hogan, W. P., & Pearce, I. F. (2017). The incredible Eurodollar: or why the world's money system is collapsing. Routledge.

Morana, C. (2017). The US Dollar/Euro Exchange Rate: Structural Modeling and Forecasting During the Recent Financial Crises. Journal of Forecasting, 36(8), 919-935.