ABSTRACT
With the imminent introduction of the euro, much discussion has focussed on the prospects for the exchange rate of the euro. In particular, how will the euro trade against the dollar? In the foreign exchange market, the dollar/euro rate will surely represent the busiest pair of currencies in the world (Table 16.1). At almost two-fifths of all trading, it looks set to claim a share twice as large as the US dollar/Deutschmark pair had, and twice as large as the US dollar/yen has. Consistent with its importance in terms of transactions, this exchange rate will prove an important determinant of the performance of investments denominated in the euro and euro-based currencies relative to those denominated in the dollar and dollar-based currencies. Like all exchange rates, however, changes in the dollar/euro rate will affect not only the performance of investments, but also the relative prices of exports sourced in Europe on the one hand, and the Western hemisphere on the other hand. Thus, changes in the dollar/euro rate can be expected to shift global demand from one continent to another with unparalleled force.
