What happens when the exchange rate of the Dollar to the Euro is 2 Dollars = 1 Euro?
Yes, we will start seeing stronger capital inflows, though there may be some petering out of US financial instruments in the financial markets. That’s simply because the expected rate of return on financial instruments has to rise that much more to compensate for depreciation when translating currencies. Bear in mind that the Euro didn’t just appear, but succeeded an already-accepted but oft-maligned European Currency Unit. As it has come to be more widely accepted by more nations (as the EU has grown), it should be expected to gain value. However, this may be tempered by inflationary pressures – the Euro’s estimated inflation rate is above 3%. If the Dollar inflation remains around 4%, then we should continue to see the dollar depreciate; if however the economic malaise hampers US productivity more, then it is possible that the exchange rate could solidify.
