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Are people relaxing on the euro?

August 29, 2011

While leaders across Europe debate what to do about the euro and if the end of the euro is near, an important indicator of the euro’s strength—the euro/dollar exchange rate—has been surprisingly calm.  As the graph below shows, since European leaders meet on July 21st and decided on a new plan to rescue Greece (indicated on the graph as “Greek Bailout II”), the exchange rate has been relatively quiet.  In fact, since this summit, the exchange rate has fluctuated by $0.0334 between its highest and lowest points.  This small change is very different from the markets’ responses to the previous three bailouts, as the euro tended to dramatically weaken right after the summit meeting (except for the after the Portuguese bailout, when the euro actually strengthened).

So why are the currency markets so quiet right now?  Perhaps investors are not responding as dramatically as one might expect due to America’s own fiscal problems.  In fact, the dollar/euro has remained relatively stable compared to other major currencies.  The chart also shows that Switzerland has been able to—at least temporarily—cancel out the strong Swiss franc (CHF) appreciation due to investors’ fears in the euro.

As a result, while the above chart indicates that plenty of fluctuation still exists in the euro exchange rate, the euro strangely has been somewhat stable recently.  Perhaps this is just the August calm before the storm or the markets’ are becoming less worried about the euro.

If you would like to learn more about the European Debt Crisis, the IU European Union Center is sponsoring a webinar on “The European Dept Crisis…and Its Implications for the US” on September 20 at 4:00PM.

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