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On January 1, 1999, when eleven nations of the European Union joined together and all shared the same currency this established the world's first common currency, it is known as the Euro. Is this Euro going to be the down fall of the American dollar as a world dominant currency? What are the effects on the United States economy from this overpowering currency? What impact will this have on travelers from the United States to Europe?
The Euro, Effects on America
On January 1, 1999 the world watched as 11 nations of the European Union joined their currencies to each other and established the world's first common currency, the Euro. The creation of the Euro will be the most important development in the international monetary system since the installment of flexible exchange rates in the early 1970's. The dollar will have its first competitor since the it replaced the pound sterling as the world dominant currency.
One of the most addressed topics regarding the Euro is the impact the Euro will have on the United States. Regarding the percentage of dollars held in reserves around the world's central banks. Currently about 60 percent of the reserves held in the world's central banks are held in U.S. dollars, and half of the global trade business is exchanged in U.S. dollars. The powerful Euro will change the percentage of reserve holdings in U.S. dollars, and will become more of a participant in global trade transactions. There was an interview with Chris Giles an associate of (The Financial Times) where he discusses central bankers being less enamored with the U.S. dollar and increasingly attracted to the Euro. Chris Giles states,
There were 65 central banks from around the world who were surveyed, and those are the reserve managers. So these are the people who actually manage their money, that central bank's hold, in case there are financial crises and they have to have money put aside for certain precautions. And they said that though they still very much like the dollar--and at the moment, about 70 to 80 percent of all the money they hold is in the dollar--in the future, they see they will put more money into European assets rather than dollar assets. (National Public Radio,2005,p.1)
There are many reasons that the Euro is becoming more attractive to the investors and to the World's central banks, again Chris Giles states,
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I think the reason why the euro is becoming more attractive is partly because they have--hold so much money in dollar assets, in U.S. Treasury bonds and just in dollars in cash. They're quite worried that if the dollar keeps on falling, this will cause them very, very large losses. And so they want to re-balance a little bit to have more money in the euro. So even though the U.S. economy is a much stronger economy than the European economy, that doesn't matter so much to them because what they're worried about is the prospect of the dollar continuing to fall and the prospect of a very large current account imbalance and trade deficit that the U.S. has, which means that the U.S. needs to suck in huge amounts of financing every day just to stop the dollar from falling further. (National Public Radio,2005,p.1)
The Euro is not all bad news for the United States. The United States economy may very will flourish with the diminishing dollar. With the value of the dollar much less than the Euro, exports will increase to European countries where now they can afford what is made in the United States. "Moreover, the Bush administration, although it says it favors a strong dollar, appears willing to accept mor decline because it helps American exporters and could help reduce the current account deficit." (Fuerbringer,2005,p.2)
One industry here in the United States that directly deals with Europe and its monetary market is the fashion industry. With the U.S. dollar becoming weaker to the Euro, it allows domestic designers an upper hand against European designers for sales here in the U.S. This is the year of the American brand, in order for business to keep sales out of the red, business have been slowly eliminating European labels as they become too expensive. This all seems beneficial to the economy here in the United States, but what impact is it going to have on the European economy? "European leaders blanch at such rarefied trading levels because they fear the euro will price their exports out of the American market. Europe's economic recovery has been fueled mainly by exports, but there is evidence of a slowing in shipments from Germany and other countries." (New York Times,2004,p.2) "European brands now make up just 20 percent of the store's inventory, compared with 80 percent five years ago." (Butler,2005,p.1)
Department Stores are stocking more domestic designs to keep prices down. The dollar's dramatic plunge-it has dropped by 33 percent against the Euro since this time three years ago-is giving U.S. apparel makers such as Marc Jacobs and John Varvatos a distinct sales edge during a period of slow growth for the industry. Apparel sales in 2004 reached $172.8 billion, which is about 2% lower than they were in 2000.""For the first time in a long time, New York has the advantage,"" says Marshal Cohen, chief analyst with trend tracking firm The NPD Group Inc. (Butler,2005,p.1)
Traveling to Europe any time soon, better pack a lunch, and maybe save up a little more money than anticipated. There has not been a decline in the amount of tourists visiting Europe, the numbers have actually increased, but the amount that each is spending is less. " Until recently, Americans have been famously big spenders in Europe, dropping nearly $30 billion a year on food, lodging, and other travel related expenses, but the greenback's slide means a buck these days is worth only 77 cents against the Euro." (Wahlgren,2005,p.1) So for an American tourist traveling to Europe you may want to budget in the exchange rate for the diminishing dollar, or for the all so powerful Euro.
The Euro looks like it is going to be around for a while and it may even take over as far as the world's banks are concerned. With investors looking into the Euro, the American dollar may just become second rate. It is going to be interesting going to the store and seeing all these new brands on the shelf. Maybe they are not new, maybe they are just domestic brands that are now the only affordable products for the consumer, while the European products become out of reach financially.
Butler, E (2005) American Style: Crain's New York Business 21 no6
Fuerbringer, J (2005,January) Drubbing of the Dollar: Dangerous or Therapeutic? Markets & Investing: New York Times.
National Public Radio(2005,January) All Things Considered.
New York Times Company (2004, December)
Wahlgren (2005) Business Week Online in Paris.