Macro Economy

In: Business and Management

Submitted By gusimei
Words 591
Pages 3
2001-2005 USD vs. Euro
Contact: When the euro has just born, the world is full of doubt to this new currency. The euro against the dollar value by listing all 1.1805 dropped to 0.8225. Then the prospect of euro problems aroused widespread concern and controversy. However, in 2002 after euro unified monetary official circulation, the situation appears 180-degree shift: in just less than 6 years, the euro against the dollar had become the second-largest currency against the dollar.
Interest rate parity (“IRP”)
When Euro just born in 1999, the interest rates spread of dollar and euro is as high as 2.5%. Higher interest rates resulted in euro carry trade: a number of European cash flow to the United States. Yet there has been a market shift in 2001. After 911, the fed’s lowered benchmark interest rate four times in a row and therefore the interest rates spread of dollars and euros began to change. The interest rate of euro is 1.5% higher than of dollar. The capital flowing from euro toward America sharply declined.
After IT bubble broke, the fed maintained the lower interest rate and thus inflation risk kept rising. Beginning in June 2004, the fed launched a new interest rate hikes cycle. Then the interest rates spread of dollar and euro again expanded. The euro against the dollar sharply fall from record high 1.3670 and continued dropping until December 2005 when the European central bank increased euro’s interest, the exchange rate had fallen back into the 1.1639. At this time the Eurozone inflation pressure also became obvious, and following the fed, European central bank launched the interest rate hikes cycle too. So, the euro has been appreciated again.
Deep reason: GDP support euro’s strong showing
The euro’s strong showing from 2001 to 2005 was inseparable from its international status. The birth of unified monetary euro promoted European economic…...

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