Euro vs. US Dollar

The Euro and the US Dollar are two of the most dominant global currencies in many different regards. Many countries hold these currencies in their government reserves, transactions in many countries can be fixed in Euro or US Dollar denominations, and the countries these currencies are officially used in are dominant in the global economy. This article will provide a brief examination of the factors that underlie some of the differences that impact the Euro vs. the US Dollar.

The Euro

The Euro (€) is the official currency of the Eurozone, which encompasses 18 of the 28 member states of the European Union.
A relatively new currency, the euro was officially circulated starting January 1, 1999. Countries that use the Euro as their official currency include:Other countries in the European Union also widely accept the currency, though still technically retain their own separate one. With 334 million daily users, it is a very widely used currency in global terms. It's relative stable compared to many other currencies, and is also used heavily as a reserve currency, claiming some of the market share previously held by the U.S. dollar and the Japanese Yen.

The Euro faces unique pressures due to the fact that so many different countries use it officially, and the decisions made by the governments and central banks of those countries can all impact the Euro's value. As such the recession in Greece ended up drastically impacting the value of the Euro and the rates at which a French person could convert their euros to U.S. dollars at the time.

This complexity is seen by many to be a major problem of the euro and something that will need to be addressed in the future if the currency is to succeed. The banks and governments of so many countries cannot be expected to pursue the same economic path all the time, making coordination of their shared currency difficult. Many factors are in place to eventually see the euro (and the financial decisions that impact it) become centrally managed at some point in the future. Until then it still has the potential to be unpredictable at times.

US Dollar

Unequivocally, the U.S. dollar is, and has been for a long time, the dominant global currency. In countries where the local economy and currency management has failed the U.S. dollar is often quickly adopted as that used for many daily transactions. Countries other than the U.S. which use the U.S. dollar as their de facto currency include:In effect, the local currency in these countries became so irrelevant or de-valued that the U.S. dollar became the dominant currency. In some cases the local currency is still used and in circulation, but the preferred currency is the U.S. dollar (with prices in stores even being in U.S. dollars).

As a reserve currency, funds held by governments, the U.S. dollar still makes up the majority of reserve holdings globally (though it has seen a decline since the 2008 financial crisis). In many international business transactions the U.S. dollar is adopted as the accepted denomination, even if all parties to the transaction have their own home currencies. This is largely due to the view of the U.S. dollar as a relatively stable currency and the wide spread circulation it has globally.

Foreign banks often offer U.S. dollar denominated accounts both for stable saving purposes and to facilitate transactions with the world's largest economy (America). As the financial factors impacting the U.S. dollar are managed by a single central bank (unlike the Euro) it is far easier to predict and understand movements in the value of the dollar.

While the growth of the Chinese Yuan and the Chinese economy will eventually cut into the U.S. dollar's dominance, it is not likely to knock the U.S. dollar off its perch. The U.S. dollar has likely an insurmountable head start and furthermore China's currency is heavily managed by the Chinese government, and easy government manipulation is not a feature you want in the currency your savings or transactions are in.
By Jeffrey Glen

Copyrighted 2020. Content published with author's permission.

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