The values of currencies are always in a flux as the value of the US Dollar, Europe Euro, and Japanese Yen fluctuates. Because of this, the amount of trade that takes place between two countries is also altered by the exchange rate. A nation’s currency will naturally rise when the value of their dollar increases. On the other hand, when their dollar drops, the nation’s economy suffers and they will be forced to devalue their dollar. This is how the value of the US Dollar changes with the exchange rate.
The United States has one of the strongest economic foundations in the world. Their economy is based on consumer spending and the manufacturing of products that we buy. As such, these industries allow for a healthy inflation of the money in the US. Because of the constant inflow of cash, the US economy is able to enjoy a high level of economic growth. The only problem is, when economic conditions do not remain stable, the value of the dollar may fall which could result in the US suffering a large amount of debt.
For most of history, countries have tried to manage their currency trades in an attempt to stabilize their currency value. These methods have been successful up until recently. Recently, the International Monetary Fund (IMF) has threatened to use a form of currency reserve. If the value of the Euro moves lower, then the US is required to purchase Eurozone debt at a certain interest rate. If this occurs, the US would be obligated to pay a large sum of money to the European government in order to prevent the Euro from making a downward turn.
Now that the economic crisis in Europe is in full swing, it is no wonder that the US has become more concerned with the fluctuations of the value of the Euro. If the Euro were to begin to weaken, this could have a very negative effect on the US economy. The USD/CHF exchange rate has a very important role in determining the strength of the American economy. It is a major determinant of how much the American economy depends on foreign trade. If the exchange rate between the US dollar and the Euro were to move in a negative direction, the impact on the US would be felt in many different ways.
One way is for American consumers to pay more for goods and services in order to make up for any lost currency value as a result of changes in the exchange rate. Another way is for American companies to invest more money in overseas markets, allowing them to gain a larger amount of foreign currency based upon their foreign profits. A third way is for American companies to pay higher interest rates to borrow money from lenders in foreign countries. All of these measures will help maintain a strong US economy.
In recent months, the Euro has begun to move in a negative direction against the dollar. At the start of this phase, the US dollar was strengthening against most major currencies, including the Euro. However, after a period of time, it began to lose ground against most major currencies, including the Japanese yen, British pound, and Swiss franc. A US government report released on August 18th indicated that the current global economic slowdown may be having a marked effect on the strength of the US dollar. In fact, the US government is reportedly worried that the weakening of the Euro could result in a weakening of the US dollar.
The weaker Euro is being viewed by many analysts as a possible sign that the US Federal Reserve may begin to raise interest rates. The Reserve already hikes interest rates once every six months, and is thought to be prepared to do so again in the near future. If it does increase the fed rate, it is likely that the Euro will weaken against the dollar, making the weaker Euro become even more economically unappealing to European Union exporters. The US is currently the largest single trading partner for the Euro, and any weakening of the Euro can negatively impact the American economy.
Other analysts believe that the recent weakness in the Euro has more to do with market psychology than with fundamental factors. As the UK official and financial markets got battered by the global recession, many analysts argued that a sense of panic had set in, and traders began to sell the British pound in order to protect themselves from losses. This sent the pound sharply down against the leading US currency, making it more difficult for British exporters to acquire dollars and keep their export price levels up. Now, as the panic has subsided and market perceptions have stabilised, the pound has begun to recover. Some economists believe that the recent drop in the Euro is an early warning that the US Federal Reserve might hike interest rates soon.