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Discussion Starter · #1 ·
There are many expats from the UK living in France it seems, a handful of Americans.
I was wondering what people know about the value of the Euro vs the British Pound vs. the American dollar. Any reputable web sources on things like purchasing power, inflation, interest rates, standard of living would be nice. My main question is whether the Euro is actually stronger and more stable and if so what criteria has been used to make that decision. I know practically no monetary currency is backed by gold anymore.
 

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There are many expats from the UK living in France it seems, a handful of Americans.
I was wondering what people know about the value of the Euro vs the British Pound vs. the American dollar. Any reputable web sources on things like purchasing power, inflation, interest rates, standard of living would be nice. My main question is whether the Euro is actually stronger and more stable and if so what criteria has been used to make that decision. I know practically no monetary currency is backed by gold anymore.
All three currencies are 'floating' freely on the currency market, and move against each other daily. There are no set values, and it's market forces that decide their values at any given time. There are a number of factors that move a currency against another. Some relate to fundamentals - relative health of its economy, success of monetary policy, interest rates, national debt, inflation and so on. But there are other forces at work, such as sentiments, speculation, chart analysis (called 'technical') and so on. As currency market is global with a huge number of players - from central banks, large corporations, to speculators, hedge funds etc, so it's very difficult, almost impossible, to predict its future movement, and why highly paid experts and analysts differ among themselves in their predictions and outlooks.
Very broadly speaking, the US$ has been on the slide lately, chiefly against euro and Japanese yen, and £ sterling somewhat to a lesser extent. Fundamental reasons are to do with the relative health of the underlying economy - while Eurozone and Japan are now emerging out of recession, US and UK still seem to be stuck with declining output and GDP, reflecting in low interest rates persisting well into 2010 and beyond. European Central Bank gave this week a strong indication about the end to the loose monetary policy (pumping liquidity into economy earlier in 2010), while no such intentions have come out of the Fed or Bank of England. Lower interest rates generally mean lower currency values, as international investors get less return for their investment.
All this may not concern us directly, but as people relocate to another country but are still paid or receive their pension or investment income in another currency, adverse movement can seriously affect their buying power and financial health. Most British expats in France have been hit very hard over the last two years with a sharp decline in the value of sterling against euro, from something near 1.50 euro to £ to around 1.10 now, a decline of around 27%. For reasons stated, nobody knows what the currency movement is likely to be 12 months from now, 3 months from now, or even next week. If you have some serious financial transaction pending, like buying or selling a property, it's possible to minimise your potential loss (but also not benefiting from favourable currency movement) by buying or selling currency futures, but you need a professional advice about it. For a would-be relocator, you just need to work out 'what if' scenarios using a predicted movement of your currency against another, such as 0%, 10%, 20% or 30% adverse or favourable, and estimate the viability of your planned move.
 

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In addition to all the factors Joppa has discussed, the big one is really whether or not UK and US expats are exposed to currency fluctuations. Many expats over here live and work in the local economy and thus more or less oblivious to exchange matters. The main group of "exposed" expats are those who are retired and drawing their pensions from "back home."

I had a very strong lesson in currencies my first job here in Europe (in Germany) where I was working for a US company at their plant in Germany. The mother company insisted that all our budgets be drawn up in US$ and that all variances to budget had to be explained (by which they meant compensated for so as to remain "on budget"). All our expenses were in DM, we were all paid in DM - so what that meant is that we were held responsible for currency fluctuations we had no control over. We could be dead on budget in DM, but wildly over or under depending on the exchange rate at any particular moment.

Currency exchange only hits you if you are exchanging one currency for another.
Cheers,
Bev
 

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Discussion Starter · #4 ·
In the 1920s in the US, it was possible for someone to buy a house on minimum wage. Was there ever such a reality in Europe, in France specifically?

I'm more interested in inflation and the devaluing of currency than exchange of currency between nations (sorry if my first question was vague). It may be difficult to predict the value of a nation's currency in the future but we can look at the past patterns to learn about how the nation came to the point where it is now. I think Joppa is right in citing national debt and interest rates. But you also accredit lower interests rates as signaling a weaker currency, is it really as simple as the value of investments that determines a currency's worth? Joppa, you say this does not concern us directly, but indirectly I think you mean to imply it changes a lot of the financial stability of a nation. In the end, we are heavily impacted.

Bev, it's interesting that the fluctuation of the deutschmark worked either against you or for you. In retrospect, how does the DM compare with the Euro?

I've read that a lot of banks, worldwide, base their economy on the dollar. Does this mean that if the dollar falls, their economy falls?
 

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In the 1920s in the US, it was possible for someone to buy a house on minimum wage. Was there ever such a reality in Europe, in France specifically?

I'm more interested in inflation and the devaluing of currency than exchange of currency between nations (sorry if my first question was vague). It may be difficult to predict the value of a nation's currency in the future but we can look at the past patterns to learn about how the nation came to the point where it is now. I think Joppa is right in citing national debt and interest rates. But you also accredit lower interests rates as signaling a weaker currency, is it really as simple as the value of investments that determines a currency's worth? Joppa, you say this does not concern us directly, but indirectly I think you mean to imply it changes a lot of the financial stability of a nation. In the end, we are heavily impacted.

Bev, it's interesting that the fluctuation of the deutschmark worked either against you or for you. In retrospect, how does the DM compare with the Euro?

I've read that a lot of banks, worldwide, base their economy on the dollar. Does this mean that if the dollar falls, their economy falls?
You've opened a can of worm with your questions!
Currency, its value, on its own or relative to others, esp majors, hinge upon a number of factors - some are even contradictory, depending on sets of circumstances in which a particular monetary action is taken. In its simplest form, a currency is a national method of settling deals and meeting debts. In pre-history, people bartered. Relative value of a commodity or service on offer depended on its perceived intrinsic worth in the eye of your trading partner. Bearskin fur was worth a lot more in the midst of winter than in high summer, for example! As economic and national life became more complicated, there grew a need to establish coinage, a form of currency, which can be used instead, whose value depended on the strength of the underlying economy. As nations began to trade with one another, methods had to be devised - other than bartering - in which debts could be settled across currencies. They looked for an absolute standard against which each currency could ba valued, and chose gold. Until the WW2, many national currencies could be converted into gold at a fixed rate, the gold standard to which you have alluded. Some third-world or soft currencies follow the dollar as the dominant trading nation and economic superpower. While a drop in the value of $ means a correspondong devaluation in those linked currencies, the impact may be minimum if most of its trading partners are also dollar-denominated (e.g. Latin America).
A low interest rate can be interpreted in different ways, and according to the conclusions you reach can either be positive or negative for the currency concerned. If low intrest is seen as a reult of prudent economic management with low debt and inflation, then it can be seen as a positive factor. But if it is as a result of the need to stimulate the economy and increase lending, as it's the case now, then it can be seen as a negative sign. Low return for holding low-interest assets can be another downer, but can also been seen in a positive light if it means increased value against major currencies, underlined by strong economic basis.
 
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