Studies

performance, causes, consequences: The enigmatic dollar-euro exchange rate and the world´s biggest forex market

Foreign exchange markets are the biggest financial markets on the globe, the dollar-euro market is the biggest among them with a daily turnover of $1.3 trillion. This market is the interface of the euro bloc and the dollar bloc which use mainly one of the major currencies, comprising 45-60% and 25% of global GDP, respectively. Hence the dollar-euro exchange rate is the prime exchange rate among thousands of others. After reviewing the exchange rate performance and the dismal state of exchange rate theories, the paper analyses in the first part the following questions: what determines the large and long swings and the turning points of the exchange rate super-cycle; what is the role of "fundamentals" and what are the non-fundamental determinants of the dollar-euro exchange rate. In the second part we analyse the consequences of high volatility and frequent misalignment of the dollar-euro rate: in what way is this exchange rate relevant for the real economies, as both the majority of the euro area's and the trade of the U.S. is denominated in own currency; what are the interdependencies between the dollar-euro exchange rate and internal imbalances in the current accounts of the euro area; has the relationship between exchange rates and trade changed, due to reduced elasticities; what is the impact of dollar-euro exchange rate on international financial markets.