Forex Investment and Currency Trading

With the Euro now trading around 1.56 against the Dollar, the size of its annual output (at market value) has exceeded that of the US.

In 2007, Euro zone GDP in was €8873.8 billion and US GDP was $13843.8 billion, implying that the exchange rate at which the Euro zone surpasses the US in size is 1.56. The true “breakeven” exchange rate is likely to be lower than 1.56 given a/ the tendency for Euro zone GDP to be revised up and for US GDP to be revised down over time; and, b/ our US economists expectation that US output declined in Q1 vs. our expectation that Euro zone output rose by0.3%qoq. But, at 1.56 currently, there is little doubt.

The development is more a symptom of the Euro’s current overvaluation than it is reflective of the fundamental dynamics of the two economies. On a PPP basis, the US is still significantly larger than the Eurozone and, with significantly faster population growth, US potential GDP growth is also higher than that of the Euro zone (around 3% per year for the US vs. 2.¼% for the Euro zone).

But, brief as the development may prove to be, European policy makers will no doubt derive some pride from today’s event.