Question

Europe’s response to the economic turmoil brought about by the global coronavirus shutdown is rekindling debate about the European Union’s financial unity. The euro has dropped 3.5% this year to $1.08, near its lowest level against the U.S. dollar since May 2017. The currency could lose another 5% by year-end, according to forecasts from Bank of America. That marks a sharp turnaround for a currency that posted its calmest year on record in 2019, when it slid 1.8%. The eurozone is headed for the deepest recession in its history, with the economy expected to contract 7.7% this year, the European Commission forecast on Wednesday. Any recovery is expected to be slow, halting and uneven, and is likely to lag that of the U.S. economy. Capital Economics, for instance, has forecast that the eurozone might not get back to pre-crisis levels until after 2022. Wall Street journal – May 14, 2020).

What are some of the major reasons for Euro to fall against dollar? Who appears be the winner of currency war United States or Europe?

Answer 1

Reasons for the Euro to fall against the dollar :

• USA - China trade war : While US and China keep on imposing trade sanctions against each other, the demand for european goods have decreased, which has sent economies like that of Germany into a turmoil
• Manufacture driven economy : The Eurozone has a largely manufacture driven economy with it's largest being Germany. Due to the coronavirus, the Chinese economy had a slowdown and the Eurozone economies are therefore more endangered
• Interest rates : Relatively lower interest rates means, nations are using Euro more as a means of funding their currencies. Hence, imports are getting costlier while exports keep on getting cheaper.
• Policy mismatch : The Federal Reserve's monetary policy is a steady one while the European Central Bank keeps on lowering their rates.
• Production problems : Industrial production within the Eurozone has taken a sharp hit owing to the coronavirus pandemic and imposed lockdowns.

Clearly, the Dollar($) seems to be better off in the currency war against the Euro(€). In terms of competetive devaluations, the Dollar has outdone the Euro. While the United States have a positive net trade owing to the fact that exports are better , the Eurozone net trade is drowning in deficits.