Contrast And Compare Essay

1490 words - 6 pages

“Euro: A common currency used by many European countries. The euro was established in 1999 when 11 European countries adopted a common currency in order to facilitate global trade and encourage the integration of markets across national borders. Euro banknotes and coins began circulating in January 2002.” (The Financial Dictionary)
“The euro was introduced in 1999 and became the official currency of participating nations in 2002. It was intended to remove the exchange rate risk of businesses participating in the EU's common market and free trade association. It has become one of the world's most important currencies. Proponents of the euro state that it is more valuable than the former ...view middle of the document...

These firms face many opportunities and threats from monetary systems and financial and capital markets. These organizations can issue securities in euro currency, because it enables the companies to avoid a magnitude of monetary authority regulations and controls and provides opportunities to escape the payment of some specific taxes. This allows tax benefits and interest rate benefits, more importantly the regulatory costs are much less, which enabled firms to raise the money in euro currency markets. The euro currency markets help to avoid many U.S. banking regulations and controls and can also lead to the reduction of the payments of some taxes, thus, the reasons that have led to the growth of the market include the interest equalization tax, U.S. withholding tax on interest received by foreign owners of domestic securities, regulation M and Q, and regulations from the U.S. Office of Foreign Direct Investment (OFDI).
Over time the US dollar has declined heavily against the euro. In fact as of now one euro is equal to $1.57 in the U.S.
In economic theory there are four major factors that effectively determine the exchange rate between two different currencies; these include comparative levels of income, the relative inflation rates, comparable interest rates, and the macro policies of the individual governments. More commonly, two factors are cited as the cause of the loss of the U.S. dollar against the euro, interest rates and the macro policy within both the budget and trade deficits.
This theory also states that investors should earn the same return for their investments of like risks regardless of the country that the investment was made. If comparable rates are different in two countries, money would be expected to flow into the country which offers the higher return. The greater rate of return would increase the demand for that country’s currency; this will eventually appreciate in value, as reflected in the exchange rate, against other currency.
The U.S. short term rates have been at a low for the last 45 years, this is the result of the U.S. Federal Reserve, (FED), setting the discount rate and the fed funds rate at only 1 percent, however, comparable rates in the Euro Zone are at two percent. According to the FED, it sees no evidence of the return of inflation and therefore expects to keep rates at this level for a considerable amount of time. Recently the FED has increased the interest rate, in order to keep the dollar under control.
A trade deficit is defined as “An economic measure of a negative balance of trade in which a country's imports exceeds its exports. A trade deficit represents an outflow of domestic currency to foreign markets.” (Investopedia) It also states that it isn’t necessarily a bad situation because over time it will often correct itself.
A deficit has been reported and growing at alarming rates in the United States for the past few decades. The cumulative U.S. trade deficit in 2003 was an...

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