EU Structure Hurting the Euro

Why is the U.S. dollar (USD) Gaining Strength Against the Euro (EUR)?



The U.S. dollar (USD) has been steadily strengthening against the euro (EUR) for a while now, but many are wondering how the USD could be gaining strength amid all of the terrible news coming out of the financial sector and the credit markets. After all, didn't the U.S. government just have to create a $700 billion bailout plan? Well, whether you believe the bailout plan is going to work, it is the U.S. government's ability to create a $700 billion bailout plan that may be giving the USD an edge over the EUR.





Scattered Fiscal Policy Hampers European Union Economic Stability



The United States (U.S.) is a group of 50 states that is governed by an overarching federal government. The U.S. Federal Government sets both national fiscal and monetary (via the Federal Reserve) policy.



The European Union (EU), on the other hand, is a group of 27 sovereign member states that are bound by a series of agreements and treaties. The EU does not have a single governing authority that is authorized to set all fiscal policy for the collective group of nations, and only 15 of the member states are affected by the monetary policies set by the European Central Bank (ECB). This lack of fiscal—and to some degree, monetary—policy cohesion and unity leaves the EU vulnerable to economic crises.



Whereas the U.S. can respond relatively quickly and singularly—both fiscally and monetarily—to economic crises, the EU must attempt to forge multi-national compromises to deal with major macro-economic issues. This is not an easy task as the economies of various European countries vary widely, and the governments of each country have loyalties to their people first and to the EU second.



As investors are fundamentally evaluating the ability of the EU to move forward and forge unanimous plans with all of its member countries, they are starting to worry that the EU will not be able to respond quickly enough to prevent excess damage to the European economy. This fear is leading many to move their assets from euro-denomited holdings to U.S. dollar denominated holdings—which increases demand for and the value of the USD.