Dollar & EuroDollar & Euroby Alberto Pinoby Alberto Pino

DollarDollarHistoryHistory

The dollar was chosen to become the monetary unit for the USA in 1785. The dollar was chosen to become the monetary unit for the USA in 1785. The Coinage Act of 1792 helped put together an organised monetary The Coinage Act of 1792 helped put together an organised monetary system that introduced coinage in gold, silver, and copper. Paper notes or system that introduced coinage in gold, silver, and copper. Paper notes or greenbacks were introduced into the system in 1861 to help finance the greenbacks were introduced into the system in 1861 to help finance the Civil War. The paper notes used several different techniques including a Civil War. The paper notes used several different techniques including a Treasury seal and engraved signatures to help diminish counterfeiting. In Treasury seal and engraved signatures to help diminish counterfeiting. In 1863, Congress put together the national banking system that granted the 1863, Congress put together the national banking system that granted the US Treasury permission to oversee the issuance of National Bank notes. US Treasury permission to oversee the issuance of National Bank notes. This gave national banks the power to distribute money and to purchase This gave national banks the power to distribute money and to purchase US bonds more easily whilst still being regulated. US bonds more easily whilst still being regulated.

The Federal Reserve Act of 1913 created one central bank and organised a The Federal Reserve Act of 1913 created one central bank and organised a national banking system that could keep up with the changing financial national banking system that could keep up with the changing financial needs of the country. The Federal Reserve Board created a new currency needs of the country. The Federal Reserve Board created a new currency called the Federal Reserve Note. The first federal note was issued in the called the Federal Reserve Note. The first federal note was issued in the form of a ten dollar bill in 1914. Finally, a decision by the Federal Reserve form of a ten dollar bill in 1914. Finally, a decision by the Federal Reserve board was made to lower the manufacturing costs of the currency by board was made to lower the manufacturing costs of the currency by reducing the actual size of the notes by 30%. The same designs were also reducing the actual size of the notes by 30%. The same designs were also printed on all dominations instead of individual designs. printed on all dominations instead of individual designs.

The designs of the notes would not be changed again until 1996 when a The designs of the notes would not be changed again until 1996 when a series of improvements were carried out over a ten-year period to prevent series of improvements were carried out over a ten-year period to prevent counterfeiting.counterfeiting.

ValueValue

The U.S. dollar is most easily The U.S. dollar is most easily measured by its measured by its exchangeexchange raterate,, which compares its value to other which compares its value to other currencies. For example, on March 3, currencies. For example, on March 3, 2008, a Euro was worth $1.58. The 2008, a Euro was worth $1.58. The dollar has declined in 40% value in dollar has declined in 40% value in the last six years, when a Euro was the last six years, when a Euro was only worth 87 cents only worth 87 cents

Exchange rates change every day because currencies are Exchange rates change every day because currencies are traded on an open market. The demand for the dollar has traded on an open market. The demand for the dollar has

declined against the Euro for many reasons:declined against the Euro for many reasons: Interest rates in the U.S. are declining rapidly Interest rates in the U.S. are declining rapidly

while those in Europe are declining more while those in Europe are declining more gradually. gradually.

Fear of recession in the U.S. means investors Fear of recession in the U.S. means investors are looking for non-dollar denominated are looking for non-dollar denominated investments. investments.

As more countries join or trade with the EU, As more countries join or trade with the EU, demand for the Euro increases. demand for the Euro increases.

As the dollar declines, investors are less likely As the dollar declines, investors are less likely to hold assets in dollars until the decline stops. to hold assets in dollars until the decline stops.

Many investors are concerned that the large Many investors are concerned that the large U.S. debt and current account deficit means the U.S. debt and current account deficit means the U.S. may let the dollar decline so the relative U.S. may let the dollar decline so the relative value of its debt is less.value of its debt is less.

Exchange rates Exchange rates Currency units per U.S. dollar, averaged over the year.[32]

1999 2000 2001 2002 2003 2004 2005 2006 2007

Euro 0.9387

1.0832

1.1171

1.0578

0.8833

0.8040

0.8033

0.7960

0.7293

Japanese yen

113.73

107.80

121.57

125.22

115.94

108.15

110.11

116.31

117.76

Pound sterling

0.6184

0.6598

0.6946

0.6656

0.6117

0.5456

0.5493

0.5425

0.4995

Renminbi 8.2781

8.2784

8.2770

8.2771

8.2772

8.2768

8.1936

7.9723

7.6058

Singapore Dollar

1.6951

1.7361

1.7930

1.7908

1.7429

1.6902

1.6738

1.5882

1.421

Canadian dollar

1.4858

1.4855

1.5487

1.5704

1.4008

1.3017

1.2115

1.1340

1.0734

Mexican peso

9.553

9.459

9.337

9.663

10.793

11.290

10.894

10.906

10.928

Source: Last 4 years 2005-2002 2003-2000 1996-1999

The Dollar as the Major The Dollar as the Major International Reserve Currency International Reserve Currency

The dollar is the most important international The dollar is the most important international reserve reserve currencycurrency, , followed by the followed by the euroeuro. The euro inherited this status from the . The euro inherited this status from the GermanGerman markmark, and since its introduction, has increased its , and since its introduction, has increased its standing considerably, mostly at the expense of the dollar. standing considerably, mostly at the expense of the dollar. Despite the dollar's recent losses to the euro, it is still by far the Despite the dollar's recent losses to the euro, it is still by far the major international reserve currency, with an accumulation more major international reserve currency, with an accumulation more than double that of the euro.than double that of the euro.

In August 2007, two scholars affiliated with the government of the In August 2007, two scholars affiliated with the government of the People'sPeople's RepublicRepublic ofof China China threatened to sell its substantial threatened to sell its substantial reserves in American dollars in response to pressure that they reserves in American dollars in response to pressure that they exercise exercise fair fair tradetrade..[23][23] The Chinese government denied that The Chinese government denied that selling dollar-denominated assets would be an official policy in the selling dollar-denominated assets would be an official policy in the foreseeable future.foreseeable future.

Former Former Federal ReserveFederal Reserve Chairman Chairman Alan Alan GreenspanGreenspan said in said in September 2007 that the euro could replace the U.S. dollar as the September 2007 that the euro could replace the U.S. dollar as the world's primary reserve currency. It is "absolutely conceivable that world's primary reserve currency. It is "absolutely conceivable that the euro will replace the dollar as reserve currency, or will be the euro will replace the dollar as reserve currency, or will be traded as an equally important reserve currency."traded as an equally important reserve currency."[24][24]

Percentage of Global currencyPercentage of Global currency

EuroEuro 1957 – 1957 – The The Treaty of RomeTreaty of Rome was signed, creating the European  was signed, creating the European

Atomic Energy Community (EURATOM) and the European Atomic Energy Community (EURATOM) and the European Economic Community (EEC). The objective of the Member Economic Community (EEC). The objective of the Member States was to remove trade and tariff barriers between them and States was to remove trade and tariff barriers between them and to form a common market.to form a common market.

   19791979 – The governments and central banks of the nine Member – The governments and central banks of the nine Member

States (States (Belgium, Denmark, France, Ireland, Italy, Belgium, Denmark, France, Ireland, Italy, Luxembourg, the Netherlands, the United Kingdom, West Luxembourg, the Netherlands, the United Kingdom, West GermanyGermany) created the ) created the EuropeanEuropean MonetaryMonetary SystemSystem (EMS) (EMS) which which had the main goal – to create a common currency. had the main goal – to create a common currency.

19881988 – The European Council, that is the Heads of State and – The European Council, that is the Heads of State and Governments, confirmed the objective of realising Governments, confirmed the objective of realising EconomicEconomic andand MonetaryMonetary UnionUnion (EMU). (EMU). A committee of experts, chaired by the A committee of experts, chaired by the then President of the European Commission, Jacques Delors, then President of the European Commission, Jacques Delors, examined ways of achieving EMU. Its report (the Delors Report) examined ways of achieving EMU. Its report (the Delors Report) proposed a transition in three stages.proposed a transition in three stages.

19921992 – Representatives of twelve European Union (EU) Member – Representatives of twelve European Union (EU) Member States signed the Treaty on European Union (Maastricht Treaty) States signed the Treaty on European Union (Maastricht Treaty) that provided for the establishment of a single EU currency and that provided for the establishment of a single EU currency and the founding of the European Central Bank.the founding of the European Central Bank.

December 1995December 1995 – The European Council – The European Council decided to adopt decided to adopt the eurothe euro as the name of as the name of the future single currency of the EU (the the future single currency of the EU (the Lithuanian form in unofficial documents is Lithuanian form in unofficial documents is euraseuras). The official ). The official graphicgraphic symbolsymbol ofof thethe euro euro €€ is derived from the Greek letter is derived from the Greek letter epsilonepsilon, denoting the first letter of the , denoting the first letter of the word Europe. The symbol is crossed with word Europe. The symbol is crossed with two horizontal lines, symbolizing stability two horizontal lines, symbolizing stability in the euro area. The alphabetic code for in the euro area. The alphabetic code for the euro is EUR, while the digital code is the euro is EUR, while the digital code is 978.978.

Exchange RatesExchange Rates The ECB (European Central Bank)targets interest rates The ECB (European Central Bank)targets interest rates

rather than exchange rates and in general does not rather than exchange rates and in general does not intervene on the foreign exchange rate markets, because of intervene on the foreign exchange rate markets, because of the implications of the the implications of the MundellMundell--FlemingFleming ModelModel which which suggest that a central bank cannot maintain interest rate suggest that a central bank cannot maintain interest rate and exchange rate targets simultaneously because and exchange rate targets simultaneously because increasing the increasing the moneymoney supplysupply results in a results in a depreciationdepreciation of the of the currency. currency.

In the years following the In the years following the Single Single EuropeanEuropean ActAct, the EU has , the EU has liberalised its capital markets, and as the liberalised its capital markets, and as the ECBECB has chosen has chosen monetary autonomy, the monetary autonomy, the exchangeexchange raterate regimeregime of the euro of the euro is flexible, or is flexible, or floatingfloating. This explains why the exchange rate . This explains why the exchange rate of the euro vis-à-vis other currencies is characterised by of the euro vis-à-vis other currencies is characterised by strong fluctuations. Most notable are the fluctuations of the strong fluctuations. Most notable are the fluctuations of the euro versus the U.S. dollar, another free-floating currency. euro versus the U.S. dollar, another free-floating currency. However this focus on the dollar-euro parity is partly However this focus on the dollar-euro parity is partly subjective.subjective.

It is taken as a reference because the euro It is taken as a reference because the euro competes with the dollar's role as reserve competes with the dollar's role as reserve currency. The effect of this selective currency. The effect of this selective reference is misleading, as it gives reference is misleading, as it gives observers the impression that a rise in the observers the impression that a rise in the value of the euro versus the dollar is the value of the euro versus the dollar is the effect of increased global strength of the effect of increased global strength of the euro, while it may be the effect of an euro, while it may be the effect of an intrinsic weakening of the dollar itselfintrinsic weakening of the dollar itself

An interest rate reduction by the An interest rate reduction by the Federal ReserveFederal Reserve on on SeptemberSeptember 18 18, , 20072007, raised the euro's value , raised the euro's value significantly and caused the dollar to fall below significantly and caused the dollar to fall below €0.70 one month later, to new record lows.€0.70 one month later, to new record lows.

Economists like Economists like Alan Alan GreenspanGreenspan suggest that suggest that another reason for the continued fall of the dollar another reason for the continued fall of the dollar is its decreasing role as the world's reserve is its decreasing role as the world's reserve currency. currency. JimJim RogersRogers declared that he thinks the declared that he thinks the dollar's value will fall even further, especially dollar's value will fall even further, especially against the against the ChineseChinese yuan yuan. Chinese officials . Chinese officials signaled plans to diversify the nation's $1.43 signaled plans to diversify the nation's $1.43 trillion reserve in response to a falling U.S. trillion reserve in response to a falling U.S. currency which also set the dollar under pressure. currency which also set the dollar under pressure. The dollar sank to new lows against the euro in The dollar sank to new lows against the euro in the days following the days following 4 4 MarchMarch 20082008, following a , following a series of dour reports on the series of dour reports on the U.SU.S. . economyeconomy and and expectations that the expectations that the Federal ReserveFederal Reserve will will continue slashing interest rates.continue slashing interest rates.

Dollar vs. EuroDollar vs. Euro Not long after the introduction of the Not long after the introduction of the euroeuro as a cash as a cash

currency in 2002, the dollar began to depreciate steadily in currency in 2002, the dollar began to depreciate steadily in value. As U.S. trade and budget deficits continued to value. As U.S. trade and budget deficits continued to increase, the euro started rising in value. increase, the euro started rising in value.

By December 2004, the dollar had fallen to new lows By December 2004, the dollar had fallen to new lows against all major currencies; the euro rose above $1.36/€ against all major currencies; the euro rose above $1.36/€ (under €0.74/$) for the first time, in contrast to previous (under €0.74/$) for the first time, in contrast to previous lows in early 2003 (€0.87/$).lows in early 2003 (€0.87/$).

In the first quarter of 2004 the U.S. dollar, with the In the first quarter of 2004 the U.S. dollar, with the advantage of Federal Reserve's policy of raising the advantage of Federal Reserve's policy of raising the interestinterest ratesrates, regained some standing against all major currencies, , regained some standing against all major currencies, climbing from €0.78/$ to €0.84/$. However, all gains were climbing from €0.78/$ to €0.84/$. However, all gains were lost in the second half of 2004, and the dollar stood at lost in the second half of 2004, and the dollar stood at €0.74/$ at the end of 2004.€0.74/$ at the end of 2004.

Since 2002, the only year in which the dollar actually Since 2002, the only year in which the dollar actually recovered against the euro was 2005. Although some recovered against the euro was 2005. Although some analysts previewed the dollar dropping as far as $1.60/€ analysts previewed the dollar dropping as far as $1.60/€ (€0.63/$), it finished 2005 with an increase against the (€0.63/$), it finished 2005 with an increase against the euro, climbing to €0.83/$. euro, climbing to €0.83/$.