This paper will discuss the general relationship between the two major currencies of the world: the US-Dollar and the Euro and the determinants for the exchange rate fluctuations
since the introduction of the Euro as the common currency of Europe during the period
between January 1999 and November 2005. Since the introduction of the Euro as the common
currency of the European Monetary Union (EMU) in 1999 this relationship was first
characterized by a sharp depreciation of the Euro followed by a three year lasting appreciation
of the same that passed over in a slight depreciation again from the beginning of 2005 in the
long run.1 This paper will first focus on the History of the international currency exchange
system from the 19th century until the end of the Bretton Woods System in 1973 and on the
history of the currency system in the European community. It will then discuss the general
determinants of exchange rates in the short and long run. It will be pointed out that in the
short run interest rate differentials and expectations of international portfolio investors matter
and in the long run the economic fundamentals such as inflation rates and GDP growth rates
of either economic region are the main factors for the behaviour of the exchange rate. In this
context the theories of the Law of one price and the purchasing power parity are introduced.
In the third part of the paper the exchange rate theories introduced in the previous part are
applied to the €-$ exchange rate in the time period between 1999 and 2005. Thus, the short
term and long term factors are used to explain the relationship between the two currencies in
this period. Finally, the last part serves as a conclusion.
Table of Contents
- 1. Introduction
- 1.1 The History of the International Currency Exchange System
- 1.2 The History of the Euro as the Common Currency of Europe
- 2. General Determinants of Exchange Rates in the Short and Long Run
- 2.1 The Short Run - The Role of Interest Rate Differentials and Market Expectations
- 2.2 The Long Run - Purchasing Power Parity (PPP)
- 2.2.1 Purchasing Power Parity - Absolute and Relative
- 2.2.2 The Monetary Approach (Quantity Theory Equation)
- 3. The Relationship between the Euro and the US Dollar
- 3.1 The Short Run – Interest Rate Parity
- 3.2 The Long Run - Economic Fundamentals, Inflation Rates and Long Term Trends
- 3.3 The US 'Twin Deficit' and the Chinese Role in the €-$ Relationship
Objectives and Key Themes
This paper analyzes the determinants of the Euro-US dollar exchange rate fluctuations between January 1999 and November 2005. It aims to explain the observed exchange rate movements by examining both short-term and long-term factors. * The historical context of international currency exchange systems. * Short-term determinants of exchange rates (interest rate differentials and market expectations). * Long-term determinants of exchange rates (purchasing power parity and economic fundamentals). * Application of exchange rate theories to the Euro-US dollar relationship. * The influence of economic factors, such as the US 'twin deficit,' on the Euro-US dollar exchange rate.Chapter Summaries
1. Introduction: This introductory chapter sets the stage for the paper by outlining its objective: to analyze the determinants of the Euro-US dollar exchange rate from 1999 to 2005. It begins by briefly discussing the historical evolution of international currency exchange systems, highlighting the shift from the gold standard to the Bretton Woods system and finally to the current flexible exchange rate system. The chapter then provides a concise overview of the Euro's history, emphasizing its introduction in 1999 and the subsequent fluctuations in its value against the US dollar. The introduction concludes by previewing the paper's structure and its main arguments, emphasizing the distinction between short-term and long-term determinants of exchange rates. 2. General Determinants of Exchange Rates in the Short and Long Run: This chapter delves into the theoretical framework for understanding exchange rate fluctuations. It differentiates between short-term and long-term determinants. The short-run analysis focuses on the role of international financial investors and their portfolio decisions, emphasizing the influence of interest rate differentials and market expectations on exchange rates. The long-run analysis introduces purchasing power parity (PPP) and the monetary approach, outlining how economic fundamentals such as inflation rates and GDP growth rates affect exchange rates in the long term. The chapter lays the groundwork for the empirical analysis in the subsequent sections by establishing a theoretical foundation for understanding the dynamics of exchange rate determination. 3. The Relationship between the Euro and the US Dollar: This chapter applies the theoretical framework developed in Chapter 2 to the specific case of the Euro-US dollar exchange rate between 1999 and 2005. It examines both short-term factors, like interest rate parity, and long-term factors, such as economic fundamentals, inflation rates, and long-term trends. A key focus is on explaining the observed fluctuations in the Euro's value against the dollar during this period, including its initial depreciation and subsequent appreciation and depreciation. This analysis incorporates discussions of relevant economic conditions of both the Eurozone and the USA. The chapter also explores the impact of the US 'twin deficit' (budget and current account deficits) and the role of China in shaping the Euro-US dollar relationship.Keywords
Exchange rates, Euro, US dollar, interest rates, purchasing power parity (PPP), inflation, GDP growth, international finance, market expectations, economic fundamentals, Bretton Woods system, twin deficit, portfolio investors, asset market approach.
Frequently Asked Questions: A Comprehensive Language Preview
What is the main topic of this paper?
This paper analyzes the determinants of the Euro-US dollar exchange rate fluctuations between January 1999 and November 2005. It aims to explain the observed exchange rate movements by examining both short-term and long-term factors.
What are the key themes explored in the paper?
The key themes include the historical context of international currency exchange systems, short-term determinants of exchange rates (interest rate differentials and market expectations), long-term determinants of exchange rates (purchasing power parity and economic fundamentals), application of exchange rate theories to the Euro-US dollar relationship, and the influence of economic factors, such as the US 'twin deficit,' on the Euro-US dollar exchange rate.
What is covered in the Introduction chapter?
The introduction sets the objective of analyzing the Euro-US dollar exchange rate from 1999 to 2005. It briefly discusses the historical evolution of international currency exchange systems (gold standard, Bretton Woods, flexible exchange rate system) and provides a concise overview of the Euro's history, emphasizing its introduction in 1999 and subsequent fluctuations against the US dollar. It previews the paper's structure and main arguments, highlighting the distinction between short-term and long-term determinants of exchange rates.
What are the key concepts discussed in the chapter on General Determinants of Exchange Rates?
This chapter differentiates between short-term and long-term determinants of exchange rates. Short-term analysis focuses on international financial investors, interest rate differentials, and market expectations. Long-term analysis introduces purchasing power parity (PPP) and the monetary approach, explaining how economic fundamentals (inflation rates, GDP growth rates) affect exchange rates. It establishes a theoretical foundation for understanding exchange rate dynamics.
How does the paper analyze the Euro-US dollar relationship?
The chapter on the Euro-US dollar relationship applies the theoretical framework to the specific case between 1999 and 2005. It examines both short-term factors (interest rate parity) and long-term factors (economic fundamentals, inflation rates, long-term trends). It explains fluctuations in the Euro's value against the dollar during this period, including its initial depreciation and subsequent appreciation and depreciation. The analysis incorporates economic conditions of both the Eurozone and the USA and explores the impact of the US 'twin deficit' and China's role.
What are the keywords associated with this paper?
Keywords include: Exchange rates, Euro, US dollar, interest rates, purchasing power parity (PPP), inflation, GDP growth, international finance, market expectations, economic fundamentals, Bretton Woods system, twin deficit, portfolio investors, asset market approach.
What is the structure of the Table of Contents?
The Table of Contents includes: 1. Introduction (1.1 The History of the International Currency Exchange System; 1.2 The History of the Euro as the Common Currency of Europe); 2. General Determinants of Exchange Rates in the Short and Long Run (2.1 The Short Run; 2.2 The Long Run (2.2.1 Purchasing Power Parity; 2.2.2 The Monetary Approach)); 3. The Relationship between the Euro and the US Dollar (3.1 The Short Run; 3.2 The Long Run; 3.3 The US 'Twin Deficit' and the Chinese Role).
- Citation du texte
- Ralph Johann (Auteur), 2005, Determinants of an exchange rate, Munich, GRIN Verlag, https://www.grin.com/document/114407
