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The US Dollar and the Euro: Deus Ex-Machina
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Abstract
Until the 19th and mid-20th centuries, economic theory explained that the economic status of a country was represented by the strength of its currency. This strength is measured by the exchange rate of one currency vis-á-vis another currency, a “zero-sum” game in which one currency gains what the other loses. In fact, during the 19th century, the strength of the Pound Sterling facilitated Britain’s global hegemonic political and economic power known as the Pax Britanica. During the 20th century, the strength of the US dollar represented both the economic and political hegemony of the US around the world known as the Pax Americana. Nowadays, the weakness of the US dollar is making specialists wonder if we are witnessing the end of Pax Americana and the beginning of something else, possibly a Pax Europea, led by the strength of the euro. This is the argument surrounding the current behaviour of the US−€exchangerateanditseffectontheeconomicperformanceofthesetwoeconomicblocs.WhilethecurrentexchangeratebetweentheUSdollarandtheeurohasbeenconsideredablessingfortheUS,ithasbecomeamatterofconcernformostEurozonecountries.Infact,wearewitnessinganunprecedentedscenariowherethecountrywithaweakcurrencyisactuallypleasedandthegroupofcountrieswithastrongcurrencyisworried.ThestrengthoftheeuroisbecomingirritatingfortheEurozoneand,nevertheless,theweaknessoftheUSdollarisalsopushingittothebrinkoflosingitsstatusasaglobalcurrency.ThisexchangeratedebateisaccompaniedbyanotherdebateconcerninghowthelatestmonetarypolicyactionstakenbytheUSandEurozonemonetaryauthorities,aimedatsolvingcurrenteconomicimbalances,areaffectingtheUS-€ exchange rate. Scholars, economists, and politicians argue that these monetary policies seem unable to solve today’s economic problems in the EU as well as in the Eurozone, but are having a tremendous impact on the US$-€ exchange rate. This paper will explain in layman’s terms the relationship (or lack thereof) between two of today’s most important economic issues: the US dollar and euro exchange rate, and the monetary policy behind it.Monetary policy, Euro, US Dollar,