The announcement made by the Department of Labor about an addition of 295,000 new jobs in the American economy has raised the confidence of many investors. This has pushed the Dollar value to new heights, while the Euro has suffered a decline for 6 consecutive days, as of the 6th March, 2015, and has fallen to an eleven and a half month low, settling at 1.0891 against the USD (United States Dollar).
The investors who look forward to making investments in the American market are eager about the steps the Federal Reserve will take in the impending months. It is probable that the interest rates will be increased by the month of June this year, although as of now, the interest rates remain unchanged.
Discussing the American market, the rate of unemployment dropped to 5.5% from the previously obtainable 5.6%, however, the average hourly wage was a disappointment. It managed to grow by only 0.1% as compared to 0.5% in the month of January, hence, it raises a big question about the nature of jobs available in the economy. The drop in the unemployment rate has now reached the low, 6-year mark.
Another reason for the amplified confidence in the USD is the narrowed trade deficit. The deficit reduced to $41.8 billion from the previous month’s $45.5 billion. Although, the prediction was set at $41.7 billion.
At the end of 2014, analysts had predicted that the Euro could plummet and hit the $1.18 mark, a 9-year low. Apparently, the prediction came true.
- As opposed to remaining at $1.18, the Euro managed to rise a little bit,
- settling at $1.1966 as of March 5,
- while it dropped even lower the next day to $1.076,
- and then settling at $1.089 by the end of the day.
According to Anthony Wu, an Expert from Vantage FX, one of the Australian Forex trading platforms, it is expected that the Euro will fall further until it gets some support.
A few months ago, back in May 2014, the Euro stood at $1.4, but even then, the dollar had been growing stronger. The shift in valuation is effected on both sides of the Atlantic. A stronger dollar definitely means that Americans can now enjoy their Greek vacations at a much lower cost. Tour companies in Greece have reported experiencing an increased interest from American tourists. Greece mainly survives on its tourism business, and a large portion of the jobs in Greece are related to the tourism industry. Speaking of Greece, the matters over there do not look that good.
The president of the European Central Bank (ECB), Mario Draghi, stated that the loans to Greece have more than doubled in the past two months, taking Greece’s debt to a whopping 100 billion Euros. Greece’s Gross Domestic Product (GDP) stands at 241.72 billion Euros, and that makes its debt nearly 68% of the GDP. The ECB announced that Greece will need to initiate a plan to fight austerity, and stick to its reform program in order to tap into the European money. Nevertheless, it is glaring that Greece has barely made any progress with regards to the reforms.
Greece has approximately 6 billion Euros in short term loan from the International Monetary Fund (IMF), and it is due for repayment in March. Reports indicate that Greece may not have adequate funds to make repayments and that makes the matters even worse. The IMF reluctantly promised that it will provide financial support for four more months, and this has temporarily taken Greece out of the world financial news headlines.
Greece has been struggling very hard for the past few years, and the piling debt is going to exacerbate the whole situation someday in the nearest future. Looking at the current situation of things, Greece will likely grace future headlines for the same matter. The inability of Greece to make the necessary repayment two years ago could have been catastrophic on the Eurozone, but this time, they are prepared for it. It would however still affect the Euro to some level.
Coming back to the falling Euro, the businesses in Europe will definitely profit from the higher dollar value, especially in regions like Germany. Whereas, American businesses dealing with Eurozone will see their profits get pinched, as their products will become expensive for the average consumer in Europe.
- Crocs, an American shoe company saw a 12 percent drop in Eurozone sale because of the plummeting Euro value.
- A similar drop in sale was experienced by another American tech company called Ciena, they claim to have experienced a $10 million drop in sale in the Eurozone.
Not all American companies will be affected. Those based in the Eurozone itself will be able to produce and sell their products at a reduced cost while experiencing an increased, if not unchanged revenue income.
Strong and weak economies
The American economy as well as the European economy, both suffered a major setback during the financial crisis of 2008. The recovery of the Eurozone has been weak, or rather anemic, whereas the US government appears to be recovering with full strength every month. The job reports can be taken as an indication of the strength with which the US is moving forward.
The US is now planning to cut the stimulus program, whereas the Eurozone just decided to dilute the value of the Euro by pouring in some more stimulus. The cut in the US stimulus program would be followed by an increased interest rate as earlier stated, and this can happen as early as June. If this happens, we will most definitely see the USD and the Euro at an equal value.
Ever since the launch of the Euro 16 years ago, its value has always stayed above that of the Dollar, thus, seeing a parity between the two currencies is long awaited. In 2000, the Euro fell below the Dollar, hitting a value of $0.82 but it was soon pushed up by the intervention of the European Central Bank and other central banks of Europe. The highest the Euro has been, was just before the collapse of 2008 when it had peaked to a value of $1.6038.
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