Dollar Euro Exchange Rate
The Dollar-Euro currency is known as Euro-Dollar market and it is an international capital market. It has specialized in the activity of borrowing and lending of currency outside the country of issue. In general, the dollar deposits made in the Bank of London, are known as Euro-Dollar. When French currency francs are deposited in the Bank of London, they are known as Euro-Francs. When English pounds are deposited into the Banks of Germany they are called as Euro-Sterling. But they are all Euro currencies. The continent of Europe commonly terms Euro-Dollars for the currency used for transactions. Thus exchange rate is determined between the European countries and the countries outside Europe. For eg: It is said that the exchange rate between U.S. dollar and Euro-Dollar is 1U.S.$ = 1.3Euro Dollar. The Euro Dollar exchange rate is determined by calculating the aggregate value of all the European currencies. Just recently, the Euro Currency gained over dollars. Currently the rate of exchange of Euro Dollar gained over U.S. Dollars as it was recently 1.358 for 1 U.S. Dollar. The dollars should still regain in order to balloon U.S. deficit.
The exchange rate of Euro Dollars has been constantly in flux. The Euro currency dollar was introduced in the year 1949. The government feared that their dollar earnings would be blocked by the U.S and therefore they disguised their earnings in the Bank of Russia and other countries. The bank of Russia also disguised their earnings in some other banks possibly in Western Europe. In this way, the other countries also began depositing the dollars in Western Banks. During that period the Euro-Dollars gained momentum. The exchange rate during this period soared up.
When the Regulation Q of the Federal Reserve Act imposed certain restrictions on interest rates on deposits, this regulation was imposed for the U.S. banks too. But this policy was not followed by the Western Banks. In this way, the investors began investing in the Bank of London and the U.S. dollars again could not attract investors due to the low interest offered. In this way, the Euro-Dollar still gained significance.
Again in the year 1963 when U.S. introduced the scheme of Interest Equalization Tax in the year 1963, the tax was payable by the U.S. residents for their earnings on foreign securities. They again raised the interest rates from the borrowers to cover the losses incurred from paying tax. Again, even this factor addded growth to the Euro currency.
In this way, a host of factors have impeded the growth of Euro-Dollar market.
There are different factors that determine the exchange rate of Euro-Dollars. The euro-currency market is not directly under the control of monetary authorities of their respective countries. It is thus free from government regulations and acts, and therefore, they follow free trade practices.
At the beginning of of Euro-Dollars was considered to be a common currency of 11 countries. In the year 1975, when Euro-Dollar exchange rate was structured they considered that there are four factors that determine the Euro-Dollar exchange rate and they are:
1. The real exchange rate 2. The real oil prices. 3. Fiscal position. 4. Aggregate price of the goods and services rendered.
But it was later criticized that the above four factors determine the rate of exchange only for a short or medium term duration. The external value of the Euro Dollar was comparatively low when reviewed in the year 1999. It was said that the Purchasing Parity Power was the most important factor to determine the exchange rate. The PPP theory states that the nominal value of exchange varies with the inflation factor. But this theory was criticized because the real rate of exchange also varied with inflation. The relationship between real rate of exchange and nominal rate of exchange could not be determined. In the mid-seventies there were many variations in the Euro-Dollar exchange rate and the reason for the fluctuations could not be determined.
To overcome the weakness of the following theories it was concluded that it was illogical to determine exchange rate for a particular period. The economists had drawn a schedule of Euro dollar exchange rate form 1975 to 1998. But the value of exchange rate dipped low in 1999. Due to the constant change in the market trends, boom, depression and other economic factors, fluctuations will most likely be occurred. Many economists studied that there are many variable factors that influence the value of exchange rate besides the four exchange factors. But largely, the major factor determining the exchange rate is the interest factor.
Till today, U.S. remains to be the leading currency that trades with Euro market. Besides, the other countries largely trade with Euro-currency are Pound, sterling, franc, Japanese Yen and Deutsche Mark.
At the beginning of 1999, the Euro Dollar had drastically weakened and it recovered again after Mid July. Afterwards, the value fluctuated for a short time. Again, it is gaining its economy due to some other factors. The oil prices have recently declined sharply. The European countries are the regular importers of oil. Their expenditure for the purchase of oil has reduced. The interest rate on deposits are higher and more and more investors are attracted to deposit into the European Banks.
Even today the exchange rates are fluctuating due to volatile market conditions.
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