By Ciera Lazarus

THE EUROPEAN CENTRAL BANK AND HOW IT EFFECTS THE AMERICAN DOLLAR

WHAT IS THE EUROPEAN CENTRAL BANK?

The ECB is the central bank for Europe's single currency, the euro. The ECB’s main task is to maintain the euro's purchasing power and thus price stability in the euro area. The euro area comprises the 19 European Union countries that have introduced the euro since 1999. 1

THE MISSION OF THE ECB• The European Central Bank and the national central banks together constitute the

Eurosystem, the central banking system of the euro area. The main objective of the Eurosystem is to maintain price stability: safeguarding the value of the euro.

• The European Central Bank is responsible for the prudential supervision of credit institutions located in the euro area and participating non-euro area Member States, within the Single Supervisory Mechanism, which also comprises the national competent authorities. It thereby contributes to the safety and soundness of the banking system and the stability of the financial system within the EU and each participating Member State.

• The European Central Bank is committed to performing all its tasks effectively. In so doing, it strives for the highest level of integrity, competence, efficiency and accountability. It respects the separation between monetary policy and supervisory tasks. In performing tasks it is transparent while fully observing the applicable confidentiality requirements.1

THE EURO• Euro banknotes (and coins) circulate widely in the euro area mainly because of tourism,

business travel and cross-border shopping. To a much more limited extent, national banknotes, before the introduction of the euro, also “moved” across borders and then had to be “repatriated”, mainly through the commercial banking system, to the central bank that issued them. Such returns are not necessary with the euro. However, since large quantities of euro banknotes do not remain in the country where they were issued but are taken to other euro countries, and spent there, the central banks have to redistribute them in order to avoid a banknote shortage in one country and a surplus in another. These bulk transfers are coordinated centrally and financed by the ECB.1

• The Euro is currently worth 1.08 US dollars

THE RELATIONSHIP BETWEEN THE US DOLLAR AND THE EURO

• The US dollar and the euro are closely tied through a variety of political and economic threads. When one is effected, so is the other. Because of this, the relationship between the Euro and the Dollar is symbiotic and relies on mutual success.

• As a result of the global market, when the dollar rises and the euro falls the us stock market takes a hit. Inversely, the same happens when the Euro rises and the dollar falls. 2

To insure stable markets, the two currencies attempt to maintain stability as much possible in order not to ruin one another economies.

THE FUTURE OF THE EURO AND THE DOLLAR• For the moment, the political and economic situation in the U.S. appears more stable to

investors than that of the eurozone, which now faces conditions that could seriously destabilize its currency. The idea of a $1 trillion European bailout was surely not contemplated when the eurozone was originally assembled. Nor do investors view draconian budget cuts by its member countries, or the possible expulsion of countries from the euro, as signs of stability.

And while the flow of funds from the euro to the dollar certainly offers benefits to the U.S., the costs of a stronger dollar are pretty significant. While a strong dollar lowers U.S. interest rates and sends down the price of dollar-denominated commodities such as oil, it also makes it harder for big U.S. exporters to sell their goods overseas.

It is this combination of declining commodity prices and slumping exports that appears to be threatening the U.S. stock market. How long this dynamic will hold is anybody's guess. But for the time being, it looks like a strong dollar and weak euro will be a drag on the values of U.S. stocks.2

WORKS CITED• https://www.ecb.europa.eu

• http://www.dailyfinance.com/2010/05/14/dollar-euro-stock-connection/