Euro Vs. U.S. Dollar

Includes: FXE, UDN
by: Katchum

There has been a lot of talk about Greece and how the euro is going to collapse. To debunk this myth, I want to give some statistics. This article is a thesis on why it's better to own the euro than the US dollar in my perspective. Shorting the dollar (NYSEARCA:UDN) could be considered. The only reason why the USD is so strong is because it's the reserve currency of the world.

There are many reasons why a currency goes up or down. Following list gives the most important ones:

  • Current account balance of the country
  • Total national debt of the country
  • Inflation rate
  • Interest rate

If the current account balance of the country is positive, a country will export more than it imports. As the population of the country exports more, they will receive more foreign money. This money will then be converted into their own currency, which is then spent or put in their banks. As the foreign money is converted into the money of the country's population their own currency will appreciate in value.

The larger the national debt of the country, the more expensive it will be to sell debt to foreigners. The government will then be obliged to monetize this debt to keep interest rates low and to be able to service this debt. Rising debt load will therefore devalue the currency.

The higher the inflation rate, the lower the currency will go. An example is Vietnam, where the dong lost much of its value due to high inflation.

When interest rates are lower than the inflation rate, there is no incentive for foreigners to buy the currency. There is no incentive to save money. The consequence is a lower currency value.

Let's look at the statistics:

1) Current account

The GDP of the US ($US 14,5 trillion) and the eurozone ($US 16 trillion) are approximately the same, so we can compare the current account balances of the two countries.

The current account deficit of the US is in the order of $US 110 billion per quarter, which amounts to $US 450 billion per year (2011).

For the Eurozone, the 12-month cumulated seasonally adjusted current account recorded a deficit of EUR 44.9 billion.

So in this case, the eurozone is the winner. Europe VS USA: 1-0.

Euro Area Current Account (Millions of EUR)

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US Current Account (Billions of USD)

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2) Total National Debt

Total US national debt is $US 15.5 trillion. Total eurozone national debt to GDP is 85%, which translates to $US 13.6 trillion. So again, Europe wins by a small margin. Europe VS USA: 2-0.

3) Inflation Rate

The inflation rate in the Eurozone is 2.6%, while the inflation rate in the US is 2.9%. And since we all know the US federal reserve is lying about inflation, the eurozone wins this one by a big margin. Europe VS USA: 3-0.

Euro Area Inflation Rate

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US Inflation Rate

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4) Interest Rate

The interest rate in the Eurozone is 1%, while the interest rate in the US is essentially zero. What's new, the euro wins again. Europe VS USA: 4-0

Euro Area Interest Rate

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US Interest Rate

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Conclusion: Europe wins by a whopping 4-0 against the USA. Perfect match!
