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Euro Continues to Rise Against Dollar, Despite Another Bailout

April 14, 2011

If someone who has not been following events in Europe were to look at the euro/dollar exchange rate, they would think that the euro is doing very well right now.  After all, the euro hit a one-year high yesterday of €1 = $1.4493, and the euro has actually risen 5.8% in the last year.  This is despite the fact that during this period, the three countries using the euro have received bailouts.  The most recent happened just last week, as the Portuguese government requested a bailout from the EU on April 7 worth about €80 billion.


While these attention grabbing headlines imply that the euro is doing poorly, as The Economist rightly pointed at that these three economies are small.  It turns out that Greece has the largest economy of the “Gang of Three,” yet it still accounts for only 2.5% of the Eurozone’s GDP.  Instead, many of the larger economies, such as Germany, are actually doing rather well (see “Recent Data Continues to Show Multi-Speed Europe”).

For currency traders, an even more important reason to push the euro/dollar exchange rate up is that the European Central Bank decided on April 7 to still raise interest rates from their record low of 1% to 1.25%.  This was a major shift in policy, as the ECB had held interest rates at the 1% rate for over two years.  The BBC has a nice video explaining the implications of this change in interest rates.  For Americans, the results of this interest rate increase means that the euro becomes stronger compared to the dollar.  Thus, while bailouts remain in the news, it is the quiet success of the other 14 economies using the euro that really help determine the exchange rate.

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