The U.S. dollar and the euro are two of the most powerful and influential currencies in the world. As the two dominant reserve currencies, they are often compared in terms of strength and stability. But which one is truly stronger? There are several factors to consider when comparing the USD and the EUR.
Factors that Determine Currency Strength
Some of the key factors that determine a currency’s strength include:
- Economic growth and performance – A currency tends to be stronger when the underlying economy is growing steadily and outperforming its peers.
- Interest rates – Higher interest rates tend to attract foreign capital and increase demand for a currency. This boosts its value.
- Inflation rates – Low, stable inflation contributes to currency strength by preserving purchasing power.
- Government debt levels – High government debt can undermine perceptions of economic stability and weaken a currency.
- Current account deficits/surpluses – Persistent current account deficits can be a sign of weakness, while surpluses signal strength.
- Political stability and credit rating – A stable political environment and high sovereign credit rating support currency strength.
By comparing the USD and EUR across these parameters, we can determine which currency is stronger currently.
Comparing Economic Growth
In terms of economic growth, the United States has generally outperformed the Eurozone since the global financial crisis. From 2010 to 2020, U.S. GDP grew at an average annual rate of 2.3%, compared to just 1.3% for the Eurozone.
| Year | U.S. GDP Growth | Eurozone GDP Growth |
|---|---|---|
| 2010 | 2.6% | 2.1% |
| 2011 | 1.6% | 1.6% |
| 2012 | 2.3% | -0.9% |
| 2013 | 1.8% | -0.2% |
| 2014 | 2.5% | 1.4% |
| 2015 | 2.9% | 2.1% |
| 2016 | 1.7% | 2.0% |
| 2017 | 2.4% | 2.5% |
| 2018 | 3.0% | 1.9% |
| 2019 | 2.2% | 1.3% |
| 2020 | -3.4% | -6.3% |
The U.S. economy has grown at a faster pace post-crisis, supporting the relative strength of the dollar. Higher growth leads to greater demand for a currency.
Interest Rate Differentials
Interest rate differentials also impact currency valuations. Between 2008 and 2022, U.S. interest rates were consistently higher than Eurozone rates. This gap in rates has widened further in 2022 as the Federal Reserve has hiked rates aggressively to combat inflation.
| Year | U.S. Base Rate | Eurozone Base Rate |
|---|---|---|
| 2008 | 2.00% | 3.75% |
| 2009 | 0.25% | 1.00% |
| 2010 | 0.25% | 1.00% |
| 2011 | 0.25% | 1.00% |
| 2012 | 0.25% | 0.75% |
| 2013 | 0.25% | 0.25% |
| 2014 | 0.25% | 0.05% |
| 2015 | 0.50% | 0.05% |
| 2016 | 0.75% | 0.00% |
| 2017 | 1.50% | 0.00% |
| 2018 | 2.50% | 0.00% |
| 2019 | 1.75% | 0.00% |
| 2020 | 0.25% | 0.00% |
| 2021 | 0.25% | 0.00% |
| 2022 | 4.00% | 2.00% |
Higher U.S. rates versus the Eurozone provide yield support for USD assets, bolstering demand for the dollar. This rate differential gives the dollar an advantage.
Inflation Rate Comparison
In terms of inflation, the ECB has consistently undershot its 2% target over the last decade, while the Fed has fared better at meeting its inflation goal. Low Eurozone inflation has contributed to a weak euro.
| Year | U.S. Inflation Rate | Eurozone Inflation Rate |
|---|---|---|
| 2010 | 1.6% | 1.6% |
| 2011 | 3.2% | 2.7% |
| 2012 | 2.1% | 2.5% |
| 2013 | 1.5% | 1.4% |
| 2014 | 1.6% | 0.4% |
| 2015 | 0.1% | 0.0% |
| 2016 | 1.3% | 0.2% |
| 2017 | 2.1% | 1.5% |
| 2018 | 2.4% | 1.8% |
| 2019 | 1.8% | 1.2% |
| 2020 | 1.2% | 0.3% |
| 2021 | 4.7% | 2.6% |
| 2022 | 8.6% | 8.5% |
The Fed’s greater success at hitting its inflation target has supported USD strength. However, in 2022 inflation has surged in both economies.
Government Debt
In terms of government debt dynamics, the U.S. does have significantly higher debt levels than the Eurozone.
| Year | U.S. Debt to GDP | Eurozone Debt to GDP |
|---|---|---|
| 2010 | 95.3% | 84.1% |
| 2011 | 99.8% | 86.8% |
| 2012 | 102.2% | 89.5% |
| 2013 | 104.8% | 91.7% |
| 2014 | 105.8% | 91.9% |
| 2015 | 105.2% | 89.7% |
| 2016 | 106.2% | 88.8% |
| 2017 | 108.2% | 86.6% |
| 2018 | 109.4% | 84.8% |
| 2019 | 109.6% | 83.6% |
| 2020 | 127.1% | 97.3% |
| 2021 | 130.2% | 96.4% |
High debt could be a risk for the dollar long-term. But so far, the U.S. has maintained demand for its debt and avoided any fallout.
Current Account Balance
The U.S. has run persistent current account deficits, while the Eurozone has enjoyed surpluses. In theory, this signals greater economic stability in the Eurozone.
| Year | U.S. Current Account Balance (% of GDP) | Eurozone Current Account Balance (% of GDP) |
|---|---|---|
| 2010 | -3.1% | 0.2% |
| 2011 | -3.1% | 0.0% |
| 2012 | -2.7% | 2.2% |
| 2013 | -2.2% | 2.2% |
| 2014 | -2.3% | 2.3% |
| 2015 | -2.6% | 3.5% |
| 2016 | -2.4% | 3.6% |
| 2017 | -2.4% | 3.6% |
| 2018 | -2.2% | 3.3% |
| 2019 | -2.2% | 2.7% |
| 2020 | -3.2% | 2.8% |
| 2021 | -3.5% | 2.6% |
Despite this deficit, the USD remains in high demand globally, limiting any negative impact on its value. But Eurozone surpluses do provide some support.
Political Stability and Credit Ratings
In terms of credit risk, the U.S. holds an advantage. The dollar benefits from the U.S. receiving the highest possible sovereign credit rating (AAA) from S&P and Fitch, compared to an AA rating for the Eurozone from these agencies.
| Credit Rating Agency | U.S. Credit Rating | Eurozone Credit Rating |
|---|---|---|
| S&P | AAA (stable outlook) | AA (positive outlook) |
| Moody’s | Aaa (stable outlook) | Aaa (stable outlook) |
| Fitch | AAA (stable outlook) | AA (stable outlook) |
This signals stronger creditworthiness and lower default risk for the U.S. government versus the Eurozone. The dollar also benefits from the stability of the U.S. political system relative to fragmentation and populism in Europe in recent years.
Exchange Rate History
Looking at the exchange rate history between the two currencies shows periods of strength and weakness:
- 1999-2002: The newly launched euro initially declined against the dollar from 1.18 to reach parity by 2002. This reflected pessimism about the viability of the new currency.
- 2003-2008: The euro staged a strong appreciation versus the dollar, rising from near parity to reach a peak of 1.60 in 2008. This reflected dollar weakness during this period.
- 2009-2011: On the back of the global financial crisis, the euro declined again to the 1.20 to 1.40 range as debt fears in the Eurozone mounted.
- 2012-2021: Another extended period of euro strength took it back up to the 1.20 to 1.25 range.
- 2022: Euro weakness driven by the energy crisis in Europe has seen it decline to approach parity again with the dollar.
The exchange rate history highlights periods of weakness for both currencies. But the current period favors USD strength.
Forecasting Future Trends
Looking ahead, relative growth and interest rate trends point to further dollar strength against the euro:
- The Fed is likely to maintain an aggressive pace of rate hikes to restore price stability, while the ECB is expected to move slower. This supports the dollar.
- U.S. economic growth could moderate but remain higher than the Eurozone average. Eurozone weakness is expected due to the energy crisis fallout.
- The Russia-Ukraine conflict has had a greater direct impact on the Eurozone economy versus the more insulated U.S., weighing on the euro.
- The Eurozone’s large current account surplus position could deteriorate as high energy imports take a toll. This erodes an advantage of the euro.
- Fiscal coordination challenges and populism risks remain a vulnerability for the Eurozone.
Based on these projections, the dollar may retain the upper hand against the euro in the medium term. The energy crisis in Europe appears to be a game changer, boosting USD strength.
Conclusion
In summary, while the euro has periodically demonstrated its strength, the current economic and geopolitical environment favors the U.S. dollar holding the edge. Key factors supporting USD strength include higher U.S. interest rates, stronger growth prospects and safe haven status.
The Eurozone energy crisis resulting from the Russia-Ukraine conflict has severely weakened the euro’s outlook. This crisis is likely to have lasting economic consequences that continue to undermine the euro.
Barring a sharp loss of confidence in U.S. economic and debt metrics, the dollar appears positioned to outperform the euro for the foreseeable future. Its role as the world’s reserve currency, depth of financial markets and liquidity are too entrenched to dislodge. For now, the USD retains its status as the stronger major global currency compared to the EUR based on growth, interest rates and stability factors.
