The International monetary and finance structure - Essay Example

The International Monetary and Finance Structure In past few years, the Euro and the Chinese Yuan have been appreciating compared to the US dollar. This growth has be attributed to several factors. For instance, by December 2013, the Chinese Yuan had appreciated cumulatively by 12% to exchange at 6.11 to the dollar compared to the 8.28 that it had been exchanging at to the dollar for over a decade since 1994 (Harjani). The Euro has also been appreciating gradually; the currency’s exchange rate to the dollar was at $1.

39 in 2014 being the strongest value since 2011 (Harjani). However, despite the growth the Euro’s value has been fluctuating even though it has not depreciated as it was expected.The appreciation of the Euro can be attributed to increasing trade surpluses in the Eurozone countries for the past years and the low rates of inflation in the Eurozone countries. For the past years, countries in the Eurozone such as France, Germany and the other seventeen countries have experienced an increase in the amounts of exports compared to imports than other countries.

For instance, in 2013, the Euro Zone exports accounted for about 13.2% of GDP while import stood at 12.6% leading to a 2.7 current accounts deficit (De La Dehesa 4). On the other hand, during the same year, U.S. exports accounted for about 13.5% of GDP while imports stood at 16.2% leading to a 2.7 current accounts deficit (4). For this reason, the Euro has been gaining strength especially in the last six years due to better current accounts compared to the U.S.Conversely, the move by the European Central Bank (ECB) to wipe out about €1 trillion two years out of the economy of the Eurozone in a move to withdraw loans taken by banks during the debt crisis is another significant factor that has led to a higher appreciation of the Euro relative to other world currencies (De Grauwe and Paulson).

In addition, De La Dehesa argues that short-term rates in the U.S. react mainly to trends in the U.S.’s equity markets. He goes ahead to say that, for this reason, short-term interest rates have a higher impact on exchange rates in the Euro area unlike in the U.S. For instance, from a historical perspective a rise of 100 basis points in U.S. short-term interest rates leads to an appreciation of the dollar by 1.7% compared to 5.7% in the Euro area (De La Dehesa 4). For this reason, De La Dehesa conclude that the Eurozone economy is more open than the U.S. economy.

The Yuan has been appreciating in recent past due to the massive growth of the Chinese economy. China has grown to become the second-largest economy in the world, with research showing that it could surpass the US in 2020s. This growth in the Chinese economy can be linked to the massive exports that China has been doing since the 1980s. The more a country exports, the more that its currency appreciates in value (Harjani). The other reason that has seen the Yuan appreciate in value is China’s Currency Policy.

China doesn’t use a floating exchange rates like other advanced economies engaged in massive exports; instead, China pegs its currency to the US dollar. Due to this policy, the Yuan’s value has been hard to ascertain with the currency being undervalued. This strategy prevents the Yuan appreciating significantly if it were floating freely, thus increasing the Chinese exports than imports leading to better currents, leading to an appreciation of the currency (Harjani).The Euro and the Yuan stand a chance to replace the U.S. dollar as the world’s major currency.

The Euro’s chance stands if the UK can adopt the Euro as the primary currency given the UK and Germany economies are strong and significant players in the zone. Moreover, if the current accounts of the U.S. continue to deteriorate relatively to those of Euro economies and China, thus the Euro and Yuan can become very strong and replace the dollar as the major world currency. However, given the U.S. is a big economy with multi-billion industries and non-governmental organization, the possibility of the U.S. dollar being replaced as the major currency world is doubtable as the U.S. controls a bigger portion of the world’s wealth.

Works CitedDe Grauwe and Paulson, John. The sad consequences of the fear of QE. Web. 18 Feb. 2015.De La Dehesa, Guillermo. The euro-dollar exchange rate: In-Depth Analysis. Economic and Scientific Policy European Parliament (2014).Harjani, Ansuya. Yuan To Topple Dollar As Top Reserve Currency: Survey. CNBC. N.p., 2014. Web. 18 Feb. 2015.