Why is the Euro Falling?

The decline of the Euro against the US dollar continues at a pace faster than expected. Yesterday, in the global currency market, the exchange rate of the Euro against the greenback fell to $1.15 for the first time in 12 years. Many financial institutions and risk assessment agencies worldwide believe that the continued fall of the Euro is inevitable in the coming months. The scenario of exchanging one dollar for one Euro is expected by many speculators to materialize by the end of 2016, with some believing that this parity could be achieved by the end of this year. The fluctuations of major international currencies are among the most exciting chapters in the contemporary history of the global economy. Following the collapse of the Bretton Woods monetary system in the first half of the 1970s, international monetary relations were established based on a floating currency system, and the determination of the exchange rates of the most convertible currencies was left to the market. Since then, the exchange rates of currencies, like commodity prices, have been determined based on supply and demand, although central banks also influence the market using various levers at their disposal. As a result, the global currency market is a field of significant fluctuations, with many winners and losers, similar to other markets. It is worth noting that in October 2000, one Euro was exchanged for 82 cents, but by 2007, the value of one Euro reached $1.60. In other words, within seven years, the value of the Euro against the dollar nearly doubled, meaning that during the same period, the prices of European exports to the US also doubled, while the prices of American goods in Europe halved. This single example illustrates the significant impact of exchange rate fluctuations on economic equations and especially international trade relations. Currently, the Euro valued at $1.60 in 2007 has become a distant memory, and the Euro is rapidly retreating against its American rival. This retreat primarily stems from the following factors: 1) Following the major financial crisis of 2007 and 2008, which affected a significant part of the world, the United States was able to exit the recession earlier than other industrial powers and return to a state of normalcy. The World Bank estimates the growth rate of the US last year at 2.4%, while the growth rate of the Eurozone was only 0.8% (one-third of the US). The gap in growth rates between the two regions is expected to continue to some extent from 2015 to 2017, according to World Bank assessments. The existing difference in the dynamics of the two economies cannot fail to affect the exchange rate between their currencies. 2) Since 2008, the US Federal Reserve has implemented an unusual monetary policy known as 'quantitative easing' to combat the financial crisis. This policy involved the central bank purchasing large amounts of US government bonds, effectively leading to the printing of hundreds of billions of dollars and injecting them into the economic arteries both domestically and abroad. This policy, by significantly increasing the monetary base in the US, has weakened the dollar over the past five years. While the US has recently ended its quantitative easing policy, the European Central Bank has just decided to adopt a similar policy of purchasing large amounts of government bonds. The currency market, anticipating the implementation of this policy, which is likely to begin this week, has naturally lowered the value of the Euro against the dollar. 3) The anticipated increase in interest rates in the US is likely another reason for the strengthening of the dollar against the Euro. The explanation is that the US central bank, following the financial crisis seven years ago, lowered the base interest rate to near zero to pull the economy out of recession. Currently, with a relative recovery in the US economy, this country's interest rate will necessarily rise. Meanwhile, in the Eurozone, due to the ongoing crisis, the European Central Bank will continue to keep this indicator at a very low level. The gap between interest rates in the US and Europe will naturally attract more capital in search of higher returns to the US, further boosting the exchange rate of the dollar against the Euro. 4) In addition to these three factors, internal crises in the Eurozone must also be considered. The ongoing economic recession in this region, the significant increase in unemployment in countries like Spain and Greece, and the rise of anti-EU parties on both the left and right do not paint a bright picture for the Eurozone. Furthermore, the Greek debt crisis remains unresolved, and the scenario of the radical left party 'Syriza' coming to power is very real. This party does not seek Greece's exit from the Eurozone but advocates for renewed discussions on debt repayment and significant easing of austerity policies, which could create new tensions in relations between Athens and other European capitals. The specter of a return to the worst days of the Greek crisis fuels the weakness of the Euro. Overall, many countries and economic entities in the Eurozone are openly pleased with the weakening of the Euro. This monetary event significantly increases the competitiveness of European goods in the dollar zone. Europeans hope that the weakness of the Euro, alongside falling oil prices, will create a more favorable environment for exiting the recession. According to some assessments, these two events could increase the growth rate of the Eurozone by 1%. It is noteworthy that current forecasts mainly indicate the long-term continuation of the current trend towards the strengthening of the dollar and the decrease in the exchange rate of the Euro. It is assumed that the dollar has entered a long period of strength similar to the early 1980s or the late 1990s. However, there are also factors that could prevent the dollar from rising even further. The most important of these is the damage that this rise causes to the US economy. Currently, with the revival of American industries, and thanks to shale oil and gas, the trade balance of this country is gradually improving. Will the continued rise of the dollar, which is bound to weaken the competitiveness of American exports, not provoke a reaction from the US Federal Reserve?