What Does a Falling Euro Mean for the U.S. pt. 1
Since the very beginning of the European Union and the creation of its currency, the euro, the dollar and the euro have been caught in a never-ending dance of fluctuation value with each other. Traditionally, the euro has typically been at a higher value than the dollar, and that is still true today. However, the euro has also been decreasing in value over the past year, while at the same time the value of the dollar has been rising. There have certainly been specific moments over the past year that are exceptions to this view. But if the wider trend continues in this way, what effect will it have on the economy of the United States? Find out what this new and changing relationship of value means for you…
According to currency fluctuation theory…
Based on several theories and predictions in the study of economics, there are several different things that one might expect to happen in this sort of situation. Due to many different concepts of how market forces work, when the value of one currency begins to fall into a decline, the prices of all of that country’s exported goods will begin to decline, as well. In the case of the euro, it means that the United States should effectively start to be able to start purchasing more and more European goods for less and less. We have seen this theory work out in practice over and over again with markets in Asia, such as Japan and China, which both have a dramatically weaker currency than the dollar. This has led to high amounts of cheaply manufactured products and electronics to flood into the United States from that region. However, this is only in theory…
Other factors
However, strictly looking at things in theory can lead to avoiding real world factors that must be addressed, such as regional differences between Europe and Asia, as well as import/export forces that can be aware of this effect, thus changing the entire equation. What can be left out of this theory is the fact that foreign manufacturers still have pricing power over their products. It is, in reality, completely in their best interests to keep their prices the same, or even increase them, as the dollar gets stronger. This is because, as the economy strengthens in the U.S., more expendable income suddenly becomes available. This means that U.S. buyers will start to increase their spending habits, particularly on foreign goods. So as long as European manufacturers hold or increase their prices, they will most likely receive a huge profit increase by using the power of the dollar against the Euro.
Continued in Part 2.