Forex Blog: Currency Trading News & Analysis.

March 9th 2005

EUR/USD exchange rate misleads

In nominal terms, the Euro has appreciated over 50% against the USD, over the course of the last few years. When examined in trade weighted terms, the Euro only appreciated 20% against the dollar over the same time period. Finally, when prices and unit labor costs are taken into account, this change in the real exchange rate reduces to below 10%. In other words, despite an enormous change in the nominal EUR/USD exchange rate, American goods and services are only 10% cheaper than they were 3 years ago.

Although there is officially only one exchange rate for the Euro, exchange rates for individual European countries can still be calculated. The Euro is unique, in that it is used by 12 different countries, each one with different domestic, economic circumstances (prices, interest rates,etc.) and independent fiscal policies. Therefore, the Euro exchange rate can be thought of as a composite of all of the member countries’ domestic exchange rates.

As it happens, some of the Euro area’s most prominent members, namely France and Germany, are characterized by below average prices and unit labor costs. In addition, these nations have increased the amount of trade they conduct with nations besides the US. The result is that when examined from the perspective of such individual countries, the Euro’s appreciation is not nearly as significant as it would appear.

Read More: The Real Picture   

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Posted by Adam Kritzer | in Euro | No Comments »

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