Written by Terry Milberger, Director of Portfolio Management

The European Union was formed in 1993 and is now an economic and political union of 27 nations located primarily in Europe.  Collectively they form the biggest economy in the world.

16 of the 27 members have formally adopted the euro as their currency.  These countries are:  Austria, Belgium, Cyprus, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia and Spain.  These 16 are referred to as the Eurozone.  Most of the other 27 members are expected to adopt the euro as their official currency.

The value of the euro relative to the dollar is important because the European Union represents the largest export market for the United States.  Since it was established, the euro has been worth a low of $.85 in 2000 to a high of $1.60 in 2008.  The current value is around $1.25.  When it is worth more U.S. dollars, it makes our goods cheaper to European buyers.  On the flip side, when it converts to fewer U.S. dollars it makes our goods more expensive in euros.

Investors are questioning what is the right value for the euro relative to the dollar.  The credit problems in many Eurozone countries, such as Greece, Spain, and Portugal, suggest that economic growth there will be retarded.  This suggests that the euro could decrease in value from current levels.  On the other hand, the United States also faces debt problems and is dealing with a sluggish economy.  If confidence does not  increase in our ability to grow, then the dollar could weaken from here.

Predicting the future value of currencies can be a futile exercise as there are many cross currents that must be dealt with.  Generally speaking though, countries that demonstrate the ability to grow while keeping inflation in check and debt levels at a manageable amount, typically  have the stronger currencies.

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