In the United States, the basic short-term rate—the Federal finds rate—was about 4. That alone would point to some appreciation of the dollar in relation to the euro. Apart from other influences, that would tend to lead to some depreciation of the dollar. But there are other influences: the growing current-account deficit of the United States has not depressed the dollar in the past year, given the high mobility of private capital that easily financed the deficit.
It is fairly safe to predict that the dollar-euro exchange rate will not move by a large amount in early unless, as is discussed below, large shifts occur in the dollar balances of official and private holders around the world.
The yen could move in relation to both the euro and the dollar, as it has in the past year. The dollar has for many years been the dominant reserve currency, the currency in which countries around the world hold their foreign exchange reserves. The deutsche mark accounted for Are countries likely to shift their official reserves out of dollars into euros?
Those countries that link their exchange rates to European currencies—by a currency board, a fixed or crawling peg, or a managed float—probably already hold deutsche marks or other European currencies in their reserves.
That applies mainly to countries in Eastern Europe, most of which link their currencies to the deutsche mark since much of their trade is with Germany. They will very likely hold their reserves mainly in euros. How rapidly, if at all, will other countries switch their reserves to the euro?
Of those that peg their exchange rates, most do so to the dollar or to a basket of currencies in which the dollar is dominant. They are unlikely to switch on a large scale. Furthermore, most Latin American and Asian countries have closer trade relations with the United States than with Europe.
They are likely to stick to the dollar, but they could gradually diversify their reserve holdings. What can be said with some assurance is that if switches of reserves from dollars to euros do occur, the process will be gradual. Central banks around the world would certainly avoid large sales of dollars and purchases of euros, since that would tend to lower the value of their remaining dollar holdings. Is the euro likely to be acquired by countries with growing reserves?
It is worth noting that a currency can take on an increasing role as a reserve currency only if its issuer incurs an overall balance of payments deficit. In other words, if holdings of a reserve currency are to increase, there must be a supply as well as a demand for it.
The United States has demonstrated that principle over the years either by running a current-account deficit, as in recent times, or by having an excess of capital outflows over its current-account surplus, as in the s and s. At present, euroland has a sizable current-account surplus. The question is, will it become a substantial exporter of capital? Another condition for reserve currency status is the existence of financial markets in which monetary authorities are willing to invest their foreign exchange reserves.
As noted below, that is also important for private holdings of a currency outside the borders of the country that issues it. In that period, current-account deficits and surpluses were financed to a much larger degree than at present by movements of official reserves. In particular, when France had a current-account deficit, it had to use its scarce reserves of gold and foreign exchange to finance it.
Search the FT Search. World Show more World. US Show more US. Companies Show more Companies. Markets Show more Markets. Opinion Show more Opinion. These reports are prepared at least once every two years, or at the request of a Member State wishing to adopt the euro.
In order to adopt the euro, Member States have to achieve a high degree of sustainable economic convergence. This is assessed on the basis of the fulfilment of the convergence criteria set out in Article of the Treaty on the Functioning of the European Union and further detailed in a Protocol attached to the Treaties.
The criteria entail the following:. Moreover, also according to Article of the Treaty, the convergence assessment will include an examination of the compatibility between the national legislation of each of the Member States in question, including the statutes of its national central bank, and Articles and of the Treaty and the Statute of the ESCB and of the ECB.
Nevertheless, Member States with a derogation can be expected to join the mechanism. A Member State which does not participate from the outset in the exchange rate mechanism may participate at a later date. In accordance with the Resolution of the Amsterdam European Council of 16 June , decisions on central rates in ERM II are taken by mutual agreement of the Finance Ministers of the euro area countries, the ECB and the Finance Ministers and central bank Governors of the non-euro area countries participating in the new mechanism, following a common procedure involving the European Commission, and after consultation of the Economic and Financial Committee.
The euro eliminates exchange rate risks between countries that adopt it, thereby lowering interest rates, and allows countries to enjoy the benefits of price stability, which is the primary objective of the ECB. It also paves the way for a deep, liquid and integrated capital market among countries that adopt it. People no longer have to change money, and pay transaction costs to do so, when travelling through the euro area.
The overall appreciation 3. The exchange rate between the euro and the United States dollar initially fluctuated, with the euro appreciating in and , but depreciating in ; the exchange rate was almost unchanged in In , there was a considerably sharper depreciation in the value of the euro against the United States dollar Thereafter, developments were again irregular, with the euro appreciating in , and , but depreciating in As a result, the euro depreciated by There were two years of marked depreciation in the value of the euro compared with the Chinese renminbi-yuan during the most recent year period, namely in and , while the euro also depreciated, but only slightly, in In all other years between and , the euro appreciated against the Chinese renminbi-yuan.
Nevertheless, over the whole year period the euro depreciated by The developments of the euro against the Japanese yen display a pattern of appreciation alternating with depreciation every two years. There was a depreciation in the value of the euro compared with the Japanese yen in and , followed by a stronger appreciation of the euro in and In and , there were further depreciations in the value of the euro against the yen, followed by more modest appreciations in and Despite a further depreciation in the value of the euro in and a very slight depreciation in , the euro appreciated by 4.
The overall pattern of bond yields for the EU weighted average was that yields were lower in than they had been in ; the earlier of these two periods was characterised by yields having been relatively high in some of the EU Member States due to issues linked to the financing of their sovereign debt see Figure 2.
In the EU, bond yields in 1. The change for the EA was even greater, as bond yields in 1. In absolute terms, bond yields in the EU fell by 1. Yields fell by more than 2. There was one exception where bond yields fell by a smaller amount: in Italy, they fell 0. The largest reductions in percentage point terms in bond yields between and were recorded for Greece and Cyprus — both of which were heavily impacted by the global financial and economic crisis and subsequent sovereign debt crisis — as high yields were reduced as the economic and financial situation stabilised.
Romania 3. There were 21 Member States where yields were below 1. The largest negative yields were in Denmark Money market rates, also known as interbank rates, are interest rates used by banks for operations among themselves.
In the money market, banks are able to trade their surpluses and deficits; Figures 3 and 4 show three-month interbank rates. In the EU, these rates peaked around or and so Figure 3 shows a time series after they had already fallen at a rapid pace between and as the effects of the global financial and economic crisis were felt. Interbank rates generally continued to fall thereafter, although at a much more moderate pace. During the whole of the period , interbank rates for the EA, the United Kingdom, Japan and the United States were consistently found within the range of
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