The rising euro and sinking dollar: Explanations and implications

The rise of the euro currency, which started use in 2002, has implications in the sinking US dollar. The euro is now the world's second most important international currency and it is used alongside or in place of the national currencies near the euro zone. Its growing importance can be described from the fact that in 2006, the value of all euro notes in circulation worldwide exceeded the value of total US currency in circulation. One of the reasons for the euro's dramatic rise and the dollar's downward spiral is due to reduced expectations regarding economic growth in the US, as well as the huge US trade deficit, which started in the 1980s. In fact, in 2000, the US was the world's largest debtor country when in 1980, it is the world's largest creditor country. Escalating federal budget deficits, deep tax cuts, a poor national savings rate, the burgeoning costs of the Iraq War, and widening trade deficits have resulted in a growing dependence on large inflows of money from abroad. The euro, on the other hand, grows in appeal due to many factors. For one, the euro zone is comparable to the US economy in terms of GDP, and that the European Central Bank has kept inflation in check and fiscal policy stable. In addition, the EU is not burdened with anything like the US's current account deficit and external debt.