Scribd
Upload
13 views

Assignment - FED Vs ECB

The document discusses two possible scenarios for the future of the dollar/euro exchange rate depending on decisions by the ECB and FED. It argues that if the ECB increases interest rates and reduces monetary supply, the euro could appreciate against the dollar. But if the ECB does not act to control inflation while the FED continues normalization, the euro will likely continue depreciating.

Uploaded by

oscarpradillosbusiness
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
13 views

Assignment - FED Vs ECB

The document discusses two possible scenarios for the future of the dollar/euro exchange rate depending on decisions by the ECB and FED. It argues that if the ECB increases interest rates and reduces monetary supply, the euro could appreciate against the dollar. But if the ECB does not act to control inflation while the FED continues normalization, the euro will likely continue depreciating.

Uploaded by

oscarpradillosbusiness
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 2

Óscar Pradillos Castrillejo

Assignment: FED vs ECB

1) What do you think will happen with the $/€ exchange rate (explain your

reasoning with the help of a graph: foreign exchange market x monetary

market)?

In the first place, to answer the question, we need to understand the context in

which we are nowadays regarding the dollar/euro exchange rate.

Since the middle of the last year, the euro has been depreciating against the

dollar. Proof of it is that the exchange rate has gone from 0,82 up to 0,94 in just

a year. As we can see in figure 1, the rhythm of euro depreciation has been

accelerated since last month.

Figure 1: Dollar/Euro Exchange Rate


Source: Refinitiv

Now, regarding the future, the answer is quite uncertain, it all depends on the

decisions taken by the ECB. We could expect two scenarios:

In the first scenario, the ECB decides to reduce the monetary supply and

increase the, still extremely low, interest rates. Therefore, they begin a

normalization of the monetary policy, as they are far behind compared to other

central banks.
Óscar Pradillos Castrillejo

Consequently, we could expect the euro to appreciate, leading the exchange rate

to the previous levels1. Needless to say, that this would make the European

economic growth to decelerate, even going into recession. Maybe, that is the

price that should be paid if we want to keep inflation and exchanges rates on

track.

In the second scenario, the ECB

decides not to increase interest rates

and, therefore, not to control inflation

via monetary policy. In case the FED

keeps on with their normalization

policy, the future is crystal clear: the

euro would keep on depreciating

against the dollar.

2) Does it benefit or harm the euro area? Why?

From my economic understanding, the answer to this second question is much

simpler than the one given to the first question.

Having a strong currency, that is able to compete with the dollar, is what made

the eurozone to become an exporting leader. The evidence shows that the

strength of the euro is what allowed commercial networks and relationships to

strengthened. Therefore, from my point of view, there is no reason to think that

the euro depreciation could benefit the euro area.

1
It should be said that the euro weakness is also caused by the reduction in exports and the
skyrocketing imports, specifically energy related. Therefore, the eurozone balance of payments is suffering,
making the euro less demanded. This could make the ECB normalization policy less effective.

You might also like