Compared to the U.S. dollar, the euro has been on a rollercoaster ride for much of 2016. At the start of 2016, one euro would get you $1.08 U.S. Today, one euro will net you $1.12 U.S.
Even though the U.S. economy is larger than the 28 member states that make up the eurozone, the euro tends to be a stronger currency because the region is more multinational and there is higher demand for the euro. And, as we have seen, central bank policies can manipulate a currency to make it more attractive for trade.
The Euro vs. the U.S Dollar
Between 200 and 2002, the euro fell below the value of the greenback, but thanks to strong economic growth, the euro rebounded, and in July 2011, one euro was worth approximately $1.60 U.S.
The strength of the euro against the U.S. dollar is in jeopardy as the economic conditions in the eurozone remain weak, with Germany, the region’s economic engine, stagnating. This comes at a time when the U.S. economy is beginning to show signs of sustainable economic growth.
According to Morgan Stanley, Germany, the largest economy in Europe is facing economic headwinds, and the country’s gross domestic product (GDP) is expected to slow for 1.5% in 2016 to just one percent next year. In 2017, Germany’s GDP will trail the broader eurozone with regards to economic growth.1
Moreover, the International Monetary Fund (IMF) said it expects the global economy to advance 3.1% in 2016 and expand 3.4% in 2017. The euro area will grow 1.7% in 2016 and slow to 1.5% in 2017. This represents two years of contraction following two percent growth in 2015.2
The other major economies in the eurozone are not running on all cylinders either. GDP in France, the second biggest economy in the eurozone came in at 1.3% in 2015 and is projected to stay the same in 2016 and 2017.
GDP growth in Italy, the third largest economy, remains moribund, at 0.8% in 2015 and 2016 and just 0.9% in 2017.
By comparison, the U.S. economy is expected to advance 1.6% in 2016 and pick up to 2.2% in 2017.
Should economic growth in the euro area remain stagnant and the U.S. economy, while subdued, continue its upward trajectory, there is a good chance the euro and U.S. dollar will head to parity. The U.S. dollar could also become stronger than the euro in 2017. The U.S. dollar could also gain against a large number of other currencies.
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- Reid, D., “Germany no longer set to drive growth in Europe: Morgan Stanley,” CNBC, September 20, 2016; https://www.cnbc.com/2016/09/20/germany-wont-drive-growth-in-europe-next-year-says-morgan-stanley.html.
- “IMF Sees Subdued Global Growth, Warns Economic Stagnation Could Fuel Protectionist Calls,” International Monetary Fund, October 4, 2016; https://www.imf.org/en/News/Articles/2016/10/03/AM2016-NA100416-WEO.
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