Dollar stands strong against the euro

Despite the January 1 debut of the euro as the sole circulating currency in participating European Union countries, economists and others still point out that the dollar is the king of currencies. From the jungles of Columbia to the steppes of Russia, people are using, dealing, stealing, counterfeiting and hoarding dollars. In fact, two-thirds of U.S. currency is in foreign hands.

The dollar has been the world's central currency since the end of World War II, when America made half the world's products and held seven-eights of its gold reserves.

Everything from petroleum to jet aircraft to cocaine is priced in dollars – and the currency is so popular with counterfeiters that the U.S. Secret Service reported an 18 percent increase in phony dollars in the first eight months of the year.

Ecuador, El Salvador and Guatemala made the dollar their official currency in the last year – joining Panama, Micronesia, Palau and the Marshall Islands.

Others, such as Hong Kong, peg their currencies to the value of the dollar to fight inflation.

The euro's 12-nation European region – including Germany, France, Italy and Spain – has a population of about 300 million and an economy roughly equivalent to that of the United States, which could seemingly pose a threat to the dollar's hegemony. But most experts don't buy it due to the fact that since the euro's inception in 1999, it has lost 24 percent of its value against the dollar, dropping from $1.18 to 88 cents.

Many Europeans, especially those in former communist countries, have been trading German marks and other national currencies for dollars in case the transition is rough.

Source: Rick Hampson, Dollar Still Dominates Despite Euro, USA Today, December 26, 2001.

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RSA Note: For the past two years the EU countries have independently continued to print notes during a period of fixed exchange rates between the independent currencies and the euro. The European Central Bank has therefore not been control of the issue of high-powered money. The temptation for central banks to profit from the situation will have been great. This anomalous situation, which is now ended, may have been the underlying cause of the decline of the euro against the dollar. If the European Central Bank prints euro’s with greater prudence, we may well see the euro regain some of its exchange value, especially if the U.S. Federal Reserve is printing dollars to hold down American interest rates.
Eustace Davie, Director, FMF

FMF 02/01/02