The American economy is rebounding quickly from the recession, while the currencies of many other countries remain stagnant. This can be seen in the relative value of different currencies. While the Euro and other currencies are not bouncing back, the US dollar is stronger than ever. In fact, there is speculation from top names such as Goldman Sachs and other top firms that the dollar may soon be equal in value to the Euro.
What a Strong Dollar Means for You
When the US dollar has a high value compared to other currencies, people will be able to buy the same products with less money. Any goods that come from a foreign country will be cheaper. This affects not just luxury goods such as European clothing, but also the prices of food, oil/gas, and other important items. Very few products are completely American made with only American materials, so a strong dollar will mean lower prices for most goods.
However, a strong dollar can be bad for multinational corporations. These companies lose money when they change their foreign income into US dollars. For example, luxury jewelry retailer Tiffany & Co has complained that the strong dollar cut into their profit for the 2014 holiday season. While it may eat into the profits of a company making millions or billions a year, a strong dollar generally benefits American individuals. In addition, most large companies use hedging investment strategies that defray the losses seen from economic changes. In other words, General Electric will be just fine.
A strong US dollar is caused by an increase in the value of the dollar and a decrease in the value of other currencies, in this case the Euro. However, there are several factors that contribute to this.
Why is the Dollar Worth More?
As you have likely noticed, the U.S. economy is finally bouncing back from the downturn of 2008. Growth really picked up at the end of 2014 and 2015 is predicted to bring even more growth and stabilization. Not only did jobs grow at the fastest rate in fifteen years, but the economy grew five percent in the third quarter alone. Although the American economy still has a long way to go before we have recovered completely from the economic downturn of the late 2000's, we are making incredible gains. In fact, the growth in the American economy is so high that the Federal Reserve is contemplating raising interest rates to keep growth slow and sustainable.
Why is the Euro Worth Less?
Europe and most of the rest of the world also suffered in the economic collapse. However, Europe has not recovered as quickly. Growth in the economy and in employment are both stagnant. The value of the Euro is actually deflating for the first time in years. In order to deal with the slumping economy, the European Central Bank may begin quantitative easing, or buying government bonds and printing more money to relieve the economic strain. This will temporarily deflate the Euro even further.
Another factor in the deflating Euro is the Greek elections. The leading party, Syriza, has stated that they plan to ask for another European bailout. Because many European countries are likely to resist, the area could become destabilized economically and politically. This uncertainty has investors spooked about the Euro.
Will this Trend Continue?
Several factors will determine if the US dollar equals the Euro in the near future. First, the outcome of the Greek elections will be important. Second, the value of the Euro will likely drop temporarily if the European Central Bank does decide to buy bonds and print more money. With unemployment at record highs in Europe and economic growth at a standstill, the Euro will likely remain low even as the US dollar continues its growth. In other words: yes, the dollar will likely equal the Euro by the end of 2015.
Currently, one euro is equal to $1.18. Just a few years ago, €1 was worth $1.60. The difference in just a few years is astounding. The Euro may even fall below the value of the dollar by the beginning of 2016.
New Opportunities and Challenges for Americans
If the dollar equals the Euro, this will bring a new set of challenges and also opportunities for Americans. The most obvious challenge will be a rise in interest rates. Homeowners and credit card owners should consider locking in a low rate now while it is still possible. This is a great time to buy a house or a car if you are in the market for one, especially if you choose financing with a fixed interest rate.
The flagging Euro combined with low gas prices holds a very fun opportunity for Americans: travel. Exchange rates are favorable now and likely to become more so in the near future. This means that everything purchased on a European vacation, from hotel to food to souvenirs, will cost less. In addition, the low price of gas will soon be reflected in lower airfares that make an overseas vacation even more attainable.
Will the US dollar equal the Euro in the near future? While it is impossible to predict the movement of a currency with absolute certainty, the rise the dollar's value combined with the instability of the Euro should mean an equal value in less than a year's time. This will open up many opportunities for Americans.
