The impact of the global financial crisis on euro-dollar exchange rate

Objectives. Financial crises are often associated with surprising exchange rate evolutions, which reflect investors` increased aversion to risk, but also a change in their preference to invest in certain currencies. Although in the outburst of the current financial crisis it was expected a dollar depreciation due to historical current account disequilibrium, the American currency actually appreciated rapidly in September 2008 – January 2009, but also in the first semester of 2010 and since the middle of 2011. The purpose of this paper is to analyze the euro-dollar exchange rate evolution since the beginning of the global financial crisis and to identify the factors that influenced the relationship between the two currencies under its impact.

Data/Methods. The exchange rate evolution can be explained with the help of fundamentals, whether they are financial and economic indicators such as consumer price index, interest rate, balance of payments, etc. or psychological factors like rumors, investors` confidence, political and economic events. But, during the financial turmoil, the analysis of fundamentals became irrelevant as the markets turned extremely volatile. In analyzing the euro-dollar relationship, we identified some specific factors that influenced the exchange rate evolution, such as increased risk aversion, “safe haven” effects or carry trade strategy.

 Results. The dollar suddenly appreciated after the crisis eruption, even though negative news was coming from the American economy. This was possible because the dollar was considered a “safe haven” currency, but also because it benefited from the strategy of carry trade. This was followed by the Eurozone crisis in 2010 which eroded ECB`s credibility and again determined an appreciation of the American dollar. The depreciation of the European currency is not necessarily a negative phenomenon, but the situation determined inconsistency in political and economic support over Eurozone, which proved that convergence criteria were unable to overtake divergent historical and geographical issues. Greece was blamed as it severely violated regulations imposed through Stability and Growth Pact, but in the end all Eurozone nations – including France and Germany, broke the rules. All over Europe there is a strong debate about the “reconstruction” of the Eurozone. But even though the tension around the euro is high and the crisis acute, the perspectives of a collapse of the Eurozone and the disappearance of the single currency is highly improbable. In conclusion, trying to forecast exchange rates or even to understand past behavior can be challenging. With the crisis still in process and the role of fundamentals still irrelevant, it is difficult to make predictions whether all this abrupt fluctuations are going to reoccur once the crisis ends. What is obvious is that all those who predicted a depreciation of the dollar turned out to be mistaken. Moreover, the euro could be still overvalued, so we could expect a further depreciation if the internal political and economic situation in Euro land worsens.