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Crisis puts US dollar to the test

The euro was trading at $ 1.178 on Tuesday, higher than on Monday evening. The European Central Bank (ECB) set the reference rate on Tuesday afternoon at 1.1783 (Monday: 1.1763) dollars. Most recently, a dollar strength had weighed on the euro. Better than expected data from the US labor market and the decision of US President Donald Trump to extend existing relief measures in the coronavirus crisis by decree could provide security for the US currency.

Despite the latest developments, however, the euro remained consistently high. For comparison: in mid-February the euro exchange rate even fell temporarily to 1.0782 US dollars and thus to its lowest level since spring 2017. Since the beginning of July, the euro has risen significantly - while the dollar has weakened increasingly. At the beginning of the month it was quoted at $ 1.12, at the end of July it was traded several times above the $ 1.17 mark. At its peak, it cost $ 1.1909, its highest level since May 2018. Only the rising number of new coronavirus infections slowed the euro down.

Help provides support

Because the market reacted quickly - especially when trying to prevent an economic collapse. For example, Trump's decision to provide aid by decree supported the dollar a little in the crisis situation, wrote foreign exchange expert Thu Lan Nguyen from Commerzbank. Even if the aid is less generous than before, an abrupt stop to fiscal support has been prevented. “A little bit of stimulus is better than none at all,” says Nguyen. "At least that's how the market seems to see it, which is why the US dollar is moderately stronger."

Of course, the euro also received tailwind from the EUR 1.8 trillion financial package announced at the end of July - EUR 1,074 billion for the next seven-year budget and EUR 750 billion for the economic recovery from the coronavirus crisis. On the foreign exchange market it was interpreted in such a way that the probability that the euro zone would break apart under the stresses of the crisis has further decreased, wrote the “Frankfurter Allgemeine Zeitung” in a comment at the end of July. The “New York Times” also spoke of the “moment for Europe's markets”.

US debt is a major driver of a weaker US dollar. "If the national debt rises faster in the US than in the rest of the world, the dollar exchange rate tends to be weaker," said economist Edgar Walk to the "world". Marcel Fratzscher, head of the German Institute for Economic Research (DIW), emphasized in the RBB interview that the value of a currency is a reflection of what people expect from the economy. "People no longer have that much confidence that the US economy will develop as well as the European economy as it would have been expected."

The crisis fueled the debate about the reserve currency

While some experts now believe that the strength of the euro is the weakness of the dollar at the moment, voices have recently become louder claiming that the US dollar as the world's reserve currency is in danger. In a "Fortune" article, for example, the former chief economist of the Morgan Stanley Bank is quoted as saying that the US dollar has many challengers for the status of the reserve currency. "There are alternatives, and the most unloved and undervalued currency in the world right now is the euro," said Roach. "I think the idea that there is no alternative to the dollar is really being tested during this Covid crisis."

In a "Handelsblatt" commentary, it was also stated that there would be no way around a "more multipolar currency system" in the long term. But the coronavirus crisis in particular has shown that the status of the US dollar is still unchallenged. Investors all over the world would almost pounce on the US currency.

According to the financial portal Finanz.at, a recent survey of 50 central banks showed that there will still be demand for the US dollar next year. Analysts wanted to know, for example, whether they think the position of the US dollar as the most important store of value for global trade reserves will change over the next five years. An overwhelming majority of those surveyed were in favor of the US dollar.

Problems with a strong currency

The current situation, so wrote the US financial news website Bloomberg, says nothing about whether the dollar will lose its status as a reserve currency. The euro could continue to gain at the expense of the dollar. According to Bloomberg, it is, however, greatly exaggerated to speak of the decline of the US dollar as the reserve currency. In the past few years, too, there have been frequent debates about the reserve currency and alternatives. However, those who saw the US dollar on the sidelines have been disappointed every time.

For economist Fratzscher from DIW, the rise in the euro over the past few weeks means “proof of confidence that Europe is doing some things right, but at the same time it is not the case that the euro is overvalued”. This is important because a strong currency also means "that it is more difficult for exporters to sell their export goods abroad," said the German expert. If the euro rises, the goods in the local currency will also become more expensive. "A rising currency is good for importers because imports become cheaper and it is usually not so good for those who export and sell goods abroad."