Euro in Crisis: Dollar’s Weaknesses Highlighted

Map of Europe Showing the High Risk Debt Countries

Taking into consideration the complexity and scale of the Greek economic crisis, it is reasonable to assume that the value of the Euro would have dropped, especially when compared to the U.S dollar. The latter has been the traditional standby currency during many periods of uncertainty. However, that is not the case.

Euro vs. the dollar

Surprisingly, the Euro has been under pressure to match up to the US dollar over the last few months and though there have been losses, they have proved to be modest. The question now is – does this bode well for the Euro or badly for the dollar? The answers seem to lie with the concerns about the dollar rather than any faith in the flagging Euro.

The dollar’s performance in comparison to other major currencies is discouraging. The value of the pound (to the dollar) has increased 5% since the beginning of October. This is despite the fact that the Bank of England had to put £75 billion into the economy to help revive it. Japanese yen, despite recent tragic events, has shown unusual strength against the dollar.

The Battle against Deflation

According to the Head of the US Federal Reserve, Ben Bernanke, if inflation or expectations of it fall too low, there would have to be a response as deflation must be avoided. To put it simply, if price pressures began falling, then Bernanke would make the Federal Open Market Committee take measures to exert more control over monetary policy. This would mean a 3rd round of controversial policies concerning quantitative easing. It can help create money and then inject it into the economy.

Officials from the Federal Reserve have been ready to downgrade their vision for the economy of the US for the next 3 years. However, it can now be argued that the main issue is the time, when the central bank decides to take this route, rather than if they will.

Prices of Commodities

The risk of the dollar falling has international consequences. It increases the threat of inflation, not just for the United States but for all the other countries in the world. Most of the world’s major commodities are valued in dollars. Therefore, any decline in the currency usually results in sky-high prices of commodities.

 

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