The fall of the US dollar

There are two reasons why concerns about a free fall of the US dollar may not
be worth considering. Firstly, the US external deficit will stay high only if US
growth remains vigorous, and if the US continues to grow strongly, it will also
retain a strong attraction for foreign capital which, in turn, should support
the US dollar. Secondly, attempts by the monetary authorities in Asia to keep
their currencies weak will probably not work in the long run.

The basic theories underlying the US dollar to euro exchange rate

Law of One Price: In competitive markets, free of transportation cost barriers
to trade, identical products sold in different countries must sell at the same
price when the prices are stated in terms of the same currency.

Interest rate effects: If capital is allowed to flow freely, exchange rates
become stable at a point where equality of interest is established.

The dual forces of supply and demand

These two reciprocal forces determine euro vs. US dollar exchange rates.
Various factors affect these two forces, which in turn affect the exchange
rates:

The business environment: Positive indications (in terms of government
policy, competitive advantages, market size, etc.) increase the demand for
the currency, as more and more enterprises want to invest in its place of
origin.

Stock market: The major stock indices also have a correlation with the
currency rates, providing a daily read of the mood of the business
environment.