Euro Exchange Rates – Scenarios That Could Impact on The US Economy – Part 1

May 8th, 2012

The euro exchange rates and current storms in Europe could have devastating consequences on the US economy, dependent on how extreme the crisis becomes. Financial experts have forecast that the euro zone recession, which began in the forth quarter of 2011, will have taken around two tenths of a percentage from the growth of the dollars gross domestic product during 2012 – this is certainly not enough to throw America’s economic recovery off course.

Economists admit it would be quite hard to predict the impact of a complete euro zone meltdown on both the US dollar and euro exchange rates, which would be considered a cataclysmic event, not dissimilar to a Lehman-style financial collapse and would probably only be brought on by one of the 17 members quitting the euro. Best Exchange Rates UK look at varying scenarios of how the sovereign debt crisis in Europe could impact on the US economy.

Scenario 1 – Mild euro-zone recession [current situation]:

In late 2011 to early 2012, the euro zone economy began to contract by around one percent and then continued to experience very slow growth. The impact of this on the US dollar was that GDP lowered by approximately 1.2 percent in the first half of 2012 – nothing too serious.

The biggest threat of the euro zone crisis to the US is through its trade partnerships. The euro zone is America’s third biggest export destination and accounts for over 15 percent of the US’s total export output – this is reliant on good euro exchange rates. Conversely, America receives very little in terms of export from Europe – only 2.1 percent of imports come from Europe.

In recent years, as America’s economy has begun to recover, it has relied less and less on trade – only 1.1 % of GDP growth has been contributed by international trade since the American recession ended. Export growth declined to 5.8 percent towards the end of 2011 and it is predicted that if consumption and business investment continue to accelerate the way they have been, that exports will continue to contribute a less important role in the US economy over the coming years. Getting the best euro exchange rates will however still play an important role in future import / export activity . This article focuses on the current relationship between the Euro debt crisis and the US economy – see part 2 for further scenarios.