Euro – U.S.

dollar relationship
It is a known fact that the euro and the U.S. dollar share the role of the world’s key
international money. Due to this fact, the relationship between them is particularly
important, not only for these two large economic areas, but also for the world economy as
the whole.

2001:-
The Dollar was the reserve currency for almost 65 years for every country, but from 2001
the trend started changing, many countries started cutting down there currency reserve
from dollar and diversified it in Euro. The trading of oil was to be done only in terms of
dollar. Only months after the euro-launch, Saddam’s Iraq announced it was switching
from selling oil in dollars only, to euros only breaking the OPEC agreement. Iran, Russia,
Iraq, all began talking openly of switching from dollar to euro. This made the demand of
Euro to increase and dollar value to depreciate. 11-Sep-2001 was a black day for US and
its economy, the terror attack on twin tower also made some impact on dollar.

18 Jul 2002:- 1.0487(Euro raised at a new high against dollar)

In 2002, the Dollar fell 10% to 17% against the major currencies partly due to seasonal
factors; Iraq changed all their petro-dollars in their vaults into euros. US economy had a
trade gap of 40 billion dollar in this year. During this year the euro banknotes and coins
have become the legal tender in 12 of the 15 Member States of the European Union
(EU) . The year 2002 impact on dollar was due some of these reason 1) Global capital
flows, 2) U.S. currency-account deficit, (3) Prospects of War with Iraq, and uncertainty
regarding North Korea, and (4) The Administration's dollar policy.

2003-2005:- Euro on Peak among central bankers

The dollar's share of Moscow's reserves had fallen below 75%, Central Bank's of many
countries, Bank of Canada, People's Bank of China and many other such banks has gone
from under 10% of reserves to over 20%., In this year many bank started to give
importance to European currency. By the end of this year, the euro accounted for 13.5%
of global foreign currency reserves, which amount to a $2.4 trillion. The euro reached
the 13.5% of global reserves in just 3 years of time. Which itself is a great achievement
for euro in such a short time of span. The Governing Council lowered the key ECB
interest rates in March and June 2003 by 25 and 50 basis points respectively, reaching
2.00%. At the same time, the Fed funds target rate was lowered to 1.00% in June 2003
the rates were continued for 2004 and 2005 due to which no major movement was seen in
the Euro-Dollar movements.

2006-2007
European MFI interest rates increased non-financial corporations by 2 basis points to
1.04%. The weighted average rate on deposits from households redeemable at up to and
including three months’ notice remained broadly unchanged at 1.99%. In the same
month, the weighted average rate on deposits from households with an agreed maturity
up to and including one year increased by 18 basis points to 2.33% and the weighted
average rate on bank overdrafts of households increased by 19 basis points to 9.97%. All
this increase in rate gave a dip in euro against dollar and it fell almost 3 year low. The
European was intimated of sub-prime crisis by IMF due to which euro prepared it to face
it and managed to overcome it.

2008-2009
In 2008, the current account deficit was $700 billion. Over half of the current account
deficit is owed to foreign countries and hedge funds. Party as a result of this deficit, the
dollar declined 40% 2002-2008. The dollar strengthened during the recession, as
investors sought a relatively safe. Since March 2009, however, the dollar has resumed its
decline. This is a result of the $11 trillion U.S. debt. Creditor nations believe that the U.S.
government is not supporting the value of dollar. A weaker dollar means that the deficit
will not cost the government as much to pay back. As creditor nations realize this, they
have been gradually changing their assets to other currencies to stem their losses. Many
fear that this could turn into a run on the dollar. This would quickly erode the value of
U.S. investments, while increasing inflation.

The reserve currency as euro was increased from $393 billion to $1.17 trillion. During
this same time period, dollar holdings decreased from $2.77 to $2.68 trillion in reserves.

China is the largest investor in dollars. As of September 2009, it held nearly $800 billion
in U.S. Treasury Securities. China in 2009 intimated that it will reduce the reserve of
dollar and diversified it in various sector.

Japan is the second largest investor, with $752 billion in holdings. It buys Treasuries to
keep the value of the yen low, so it can export more cheaply. However, its debt is now
200% of its GDP. It is facing pressure to lower its debt burden, causing it to sell dollars.

Oil-exporting countries (and the Caribbean banking centers that often serve as their front)
hold $356 billion. Many started trading oil into euro.

This made a great change in the demand of euro and dollar the euro started appreciating
in a large manner the demand of euro was in such a high that euro touched its high of
1.6030 in 2008 and maintained it for quite long time. The euro can surely be the major
reserve currencies if many countries wouldn’t have huge amounts of dollar in there
reserve area.

2010:-
The euro fell to its lowest in more than four years against the dollar this year in may
because of Germany, it announced a ban that covered some high-risk bets involving euro-
denominated government bonds, credit default swaps based on those bonds, and shares in
Germany's 10 top financial institutions after this news in the market the investor started
taking out there money from bonds due to which the demand of euro fall in large and it
touched the lowest of 1.1942 in June.