FEMISE RESEARCH PROGRAMME A Perspective on the Future Dollar-Euro Exchange Rate: Implications for the Peripheral Mediterranean Countries Simon Neaime Institute of Money and Banking American University of Beirut September 2000 This text has been drafted with financial assistance from the Commission of the European Communities. The views expressed herein are those of the authors and therefore in no way reflect the offical opinion of the Commission A Perspective on the Future Dollar-Euro Exchange Rate: Implications for the Peripheral Mediterranean Countries* Project Coordinator: Simon Neaime Institute of Money and Banking American University of Beirut Email:
[email protected] _________________________ *This work has benefited from a financial grant from the Commission of the European Communities within the context of the FEMISE program. The views expressed are those of the beneficiary and therefore in no way reflect the official opinion of the Commission. ABSTRACT There has been considerable interest in recent years in the prospective dollar- euro exchange rate motivated by the launch of the single currency in Europe. This project studies some of the factors that may constitute the main determinants of the dollar-euro exchange rate. In particular, it argues that in the year 2002−when the euro becomes legal tender within the euro area−there will be an appreciation in the value of the euro against the US dollar arising from shifts in demand towards the euro. Such shifts would work through EU trade invoicing, private portfolio diversification inside and outside the euro area, and central banks’ reserves diversification, strengthening the value of the euro against the dollar.