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Q&A: What does it mean that the Euro is "overvalued"?

Question

What does it mean that the Euro is "overvalued"?

You write: "I do believe the Euro is overvalued here relative to the US Dollar..."

Does that mean if I buy a Euro with US Dollars at the going rate I am paying too much?

Answer

It means that if you use US Dollars to buy Euros, you may have to use more Euros to buy back the same amount of US Dollars down the road if the Euro declines in value against the US Dollar.

If you (as a US citizen) are traveling to Europe while the Euro is trading at a premium to the US Dollar, it means that your trip is going to cost you more for everything that you buy that is denominated in Euros. If the Euro declines against the US Dollar, then it means that your US Dollar buying power will be increased and that goods and services denominated in Euros will cost you less in terms of the US Dollar.

For foreign trade, the concept is the same. If the Euro trades at a premium to the US Dollar, it will cost the US more to import Euro-denominated goods to the US. If the Euro declines against the US Dollar, then it will cost less to import the same amount of goods (assuming the nominal price of goods stay the same).


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Euro, foreign trade, Forex, US Dollar

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