Some experts believe that the Euro is replacing the dollar as a world currency, but many other financial experts believe that this is just not so. They believe the rise of the Euro against the dollar has more to do with financial money flows, than with any real economic fundamentals for replacing the dollar with the euro.
Specifically, financial experts at Morgan Stanley do not believe that the European currency is replacing the U.S. dollar as the world’s reserve currency. Luca Bindelli and Stephen Jen, two top economists at Morgan Stanly believe that the reason for the stronger euro have more to do with money flows and not with any real economical fundamentals.
These economists state that the Euro has been overvalued, due to diversification from both home and world investors. Home investors seem to be diversifying into other countries, but remaining within their euro zone, and investors from other countries, seem to have their sight on UK investments.
Bindelli and Jen reiterated their opinion when they stated: “One perverse implication is that, when the euro zone economies finally achieve economic convergence, the benefits of diversifying within the zone should decline and European [investment funds] will need to diversify more outside the euro zone than within the zone.” Their belief is that when this happens, then currency markets will be changing within the next few years.
In the U.S. financial experts and managers that handle insurance companies, pension funds, and mutual funds (collectively about $22 trillion U.S. dollars) are currently steering toward diversification outside the U.S. dollar. As proof of this trend, Morgan Stanly has seen growth in their non U.S equity by about 23%, and this is a 10% growth rate in the last few years. But this growth is not necessarily due to a lack of faith in the dollar, but more the ability to take advantage of the availability of world finance and globalisation.
The verdict stands then, that the euros’ reason for standing so high, is most likely due to capital flows, and no real economic fundamentals. "Only seven years ago the euro was ridiculed by investors,” say Bindelli and Jen, and for world economic fundamentals to change so drastically in such a short time is very unlikely.
Still, the facts are that the euro has risen 30% above the U.S. dollar in only two years time.
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