EuroCurrency GlobalExperts

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					Euro Currency is the currency of the European Union. The European Union (EU) is a
union of independent states based on the European Communities and founded to enhance
political, economic and social co-operation. Formerly known as European Community
(EC) or European Economic Community (EEC). The European Union has 25 member
states, an area of 3,892,685 km and approximately 460 million EU citizens as of
December 2004. If it were a country, it would be the seventh largest in the world by area
and the third largest by population after China and India. The European Union has land
borders with 20 nations and sea borders with 31.
(Wikipedia)


As per European commission Euro currency, the euro is the single currency shared by
(currently) 15 of the European Union's Member States, which together make up the euro
area. The introduction of the euro in 1999 was a major step in European integration.




The following picture is showing the snapshot of EuroMembers:
The major benefits of the Euro currency is the sharing a common Euro currency which is
enabling the simpler and less expensive inter-nation trading. The common currency
also enables less fluctuations and lesser risk.
In Global terms the US Dollar is the leading currency and now the Euro is the second
most important with the Sterling British Pound third. (Caxtonfx, 2007)


When the euro came into being, monetary policy became the responsibility of the
independent European Central Bank (ECB), which was created for that purpose, and the
national central banks of the Member States having adopted the euro. Together they
compose the Eurosystem. Hence ECB is monitoring the Euro currency with the guidance
of all the EU members.
Euro enabling to raise money -


International financial markets play a crucial role in global business. Business firms face
many opportunities and threats from monetary systems and financial/capital markets.
Organizations might issue securities in euro currency, because it will enable the
companies to avoid a variety of monetary authority regulations and controls, and it
provides them with an opportunity to escape the payment of some taxes. Thus this allows
tax benefits and may be in terms of interest rates. Moreover the regulatory costs are also
less. Thus the firm can raise the money in Euro currency markets. The Eurocurrency
market, helps to avoid many U.S. banking regulations and controls, and it can lead to
reduction in the payment of some taxes. Thus the reasons that have led to the growth of
the this market include the interest equalization tax, U.S. withholding tax on interest
received by foreign owners of domestic securities, Regulations M and Q, and regulations
from the U.S. Office of Foreign Direct Investment (OFDI).


Trend of US Dollar against Euro
The US dollar has declined heavily against Euro.




Infact as of now 1Euro= 1.57US Dollar.


Economic theory states that there are four major factors that determine the exchange rate
between two currencies: the comparable interest rates, the relative inflation rates, the
comparative level of income, and the macro policies of the respective governments. Two
of these factors are most commonly cited as the causes of the loss in value of the dollar
against the Euro: interest rates and macro policies (both the trade and budget deficits).
Short-term Interest Rates


Economic theory states that investors should earn the same return for investments of like
risk regardless of the country in which the investment is made. If comparable rates differ
in two countries, capital (money) would be expected to flow into the country offering the
higher return. The greater rate of return would increase the demand for the country's
currency, which would appreciate in value, as reflected in the exchange rate, against the
other currency. Short-term rates in the U.S. have been at 45-year lows resulting from the
U.S. Federal Reserve's (Fed) setting the discount rate and the Fed Funds target rate at 1
percent. Comparable rates in the eurozone are 2 percent. The Fed continues to state that it
sees no evidence of the return of inflation and expects to keep rates at this level for a
"considerable period." But off late Fed is increasing the interest rate to keep the dollar
under control


Trade Deficit


A trade deficit is created when the aggregate imports of a country exceed its aggregate
exports. A trade deficit must be financed with government issued securities. The
cumulative U.S. trade deficit set an annual record during 2003 with the $489.4 billion
deficit surpassing the previous record of $418 billion recorded in 2002. In addition, the
deficit grew from 4 percent of GDP in 2002 to 4.5 percent in 2003.[5] To finance the
deficit, the government must attract funds domestically and/or globally. Some market
participants fear the size of the deficit coupled with the low interest rates discussed above
could cause financing problems.




Government Budget Deficit


If a government's expenditures exceed its receipts, then a deficit is created. As is true
with the trade deficit, the budget deficit must also be financed with government
borrowing. The federal budget surplus of the Clinton years has turned into the increasing
deficit of the Bush years. The deficit has ballooned as taxes were decreased to stimulate
the economy and government spending was increased to fight terrorism. However, the
U.S. economy seems to have rebounded with a remarkable 8.2 percent growth in GDP in
the third quarter of 2003. Consensus forecasts for 2004 predict that the U.S. economy
will grow at 4.2 percent, compared with 2 percent for Japan and 1.8 percent for the
eurozone.[9] As the U.S. economy rebounds, receipts will increase, and if no additional
economic or political shocks occur, the deficit should begin to decrease.


PEGGING OF OTHER CURRENCIES WITH US


Today international finance uses the US dollar as the dominant reserve currency instead
of gold which is intrinsically worth more than kindling or toilet-paper. Yet our fiat
money is still treated as the world's gold standard. In order to protect an attack on its
currency, a country's central bank must have dollar reserves corresponding to its currency
in circulation. The dollar now accounts for 68% of global currency reserves, up from
51% a decade ago. However, at the same time, we sell only 12.3% of the world's goods
but we buy 18.9%. That's like spending 150% of your paycheck every week. Yet the
rest of the world keeps producing things in exchange for a bunch of green paper printed
in the USA.
Why? The answer is that the world's most essential commodities, including oil are
denominated in dollars. Everyone accepts dollars because you need dollars to buy oil.
This all came about in 1974, when the Saudi oil cartel agreed to dollar hegemony in
exchange for American arms. Foreign countries have to buy this money in order to buy
the oil they need.
But now there's a new currency vying for hegemony, the Euro. Today European banks
are seeking to have the Euro accepted as the new world reserve currency.
Euro is Enabling Diversification of risk in foreign exchange markets
Today international finance uses the US dollar as the dominant reserve currency instead
of gold which is intrinsically worth more than kindling or toilet-paper. Yet our fiat
money is still treated as the world's gold standard. In order to protect an attack on its
currency, a country's central bank must have dollar reserves corresponding to its currency
in circulation. The dollar now accounts for 68% of global currency reserves, up from
51% a decade ago. However, at the same time, we sell only 12.3% of the world's goods
but we buy 18.9%. This is because the world’s most essential commodities, including oil
are denominated in dollars. Everyone accepts dollars because dollars are needed to buy
oil.   Foreign countries have to buy this money in order to buy the oil they need.
Thus earlier it was like unipolar world where US dollar dominated the global foreign
exchange markets. But now there's a new currency vying for hegemony, the Euro. Today
European banks are seeking to have the Euro accepted as the new world reserve currency.
Thus there is alternate available in form of Euro.
It has reduced the cross border risk in the euro zone as it has single currency. Now euro
as a currency is more flexible and deeper then the currencies like Pound or Francs. Before
the euro, eighty per cent of the world's currency reserves were held in US dollars. This
gives the US economy a huge subsidy in that reserve dollars are invested in US
institutions or foreign institutions under US control. Now the investor has another option
in form of EURO. Some of the subsidy the USA gains would be transferred to the EU
and help balance out some of the problems of the present heterogeneous economic
structure still in place.
The strength of the euro relative to the US dollar might encourage the use of the euro as
an alternative reserve currency. Thus now one has to be dynamic and keep track of both
Euro and dollar movements to make the future strategy.


   According to the EC, the benefits of Euro are:


      Elimination of exchange rate fluctuations




      Businesses are better able to plan their investment decisions because of reduced
       uncertainties.
         Elimination of the various transaction costs




         Price transparency




         Enhanced competition


         More opportunities for consumers


         More attractive opportunities for foreign investors




ec.europa.eu/economy_finance/euro/benefits/benefits_2_en.htm


References:
          www.en.wikipedia.org
           . MACRO ECONOMICS: BY MISHRA & PURI
          Financial Management by I.M. Pandey
          Study material Of ICFAI of International financial Management.
          Demasky, Global finance.
          www.stetson.edu/~jmallett/fin503/ppt/Ifmch10S2002.ppt
          en.wikipedia.org/wiki/Foreign_exchange_market
          http://www.glreach.com/eng/ed/art/rep-eur14.html as retrieved on 12 May 2007
           22:33:15 GMT.
          http://www.caxtonfx.com/converter/converterpro.html as retrieved on 26 Mar
           2007 19:09:46 GMT.
          http://ec.europa.eu/economy_finance/euro/our_currency_en.htm as retrieved on
           21 May 2008 04:53:07 GMT.

				
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