Why the Dollar is Better than the Euro in Two Simple Charts

The global economic turmoil that started in the late 2000s took its toll on the major economies like the U.S. and the euro zone. Now, a couple of years after the global economic slowdown had started, it seems that the U.S. is on its way to recovery while the euro zone isn’t there just yet.

Exhibit A

U.S. vs Euro Zone GDP Growth

Despite the recent optimism that has taken over the markets, it would be careless to mindlessly buy EUR/USD with the assumption that all will be well in the euro region compared to the U.S. In fact, if we compare the real GDP numbers for both the U.S. and the euro zone, we will see that the U.S. is closer to its 2006 growth rates than the euro zone is.

Remember that the global financial crisis started in the U.S. in 2007 before it spread to other regions like the euro zone. The crisis had more impact on the euro region though, which resulted in a steeper drop in growth rates.

Both economies started recovering in 2009, but with threats of austerity, default, and political instability in the euro zone, the task of printing higher growth rates became harder for the euro region than the U.S.

Exhibit B

U.S. vs Euro Zone Unemployment Rate

It’s also important to point out that joblessness in the U.S. rose in a steeper manner compared to the euro zone during the financial crisis.

However, when 2009 came along, unemployment in the U.S. started to taper off and even decline. Meanwhile, in the euro zone, the percentage of the labor force without jobs continues to climb and is showing no signs of reversal.

Fundamentally speaking, it’s pretty clear that the U.S. is on a better path than the euro zone. But the question on my mind right now is this: Will this translate to dollar strength? Or will the market factors determine which currency will end up on top? What do you think?

  • Victor M. Herraez

    Well. Im no pro but my opinion is that currently:

    – Risk ON environment is pushing dollar down

    – Good fundamentals on USD are pushing dollar up

    Result: For the moment USDx is without a clear directional Bias. Euro is going up with the recent hawkish comments from ECB creating a bullish sentiment, which may not last long.

    • huck

      Hey, you don’t need to be a pro to have an opinion! Nice analysis!

      • Victor M. Herraez


  • ShainS

    What are the respective sources of data for these graphs and are they comparable?

    Some food for thought, albeit a bit dated as the following analysis was written in 2007 …

    Even discounting for measurement/calculation differences : while it’s true that the US has a better unemployment record, the key to understanding the difference between the EU and the US lies in disaggregating employment by age group.

    Comparing employment rates in 2005 of the 25-55 age group, there is virtually no difference; the employment rates are 86% and 88% for the EU-15 and the US, respectively (ignoring differences in how the data are recorded). The US data show a lower unemployment rate for youth (15-24) and a much lower rate for pre-retirement (55-64) and post-retirement (65 and over) groups. What the average unemployment figures hide is the age-specific nature of the “European problem.” [The picture remains much the same when comparing the EU-25 and the US and the EU-25.]

    The crucial element in understanding these differences is income distribution. At the youth end of the scale, young workers in the US get less education and those who go to college are more likely to work
    part-time than their European counterparts. At the older end of the
    scale, pension provision in the US is neither as broad nor as generous
    as in the EU, so people – particularly the poor who cannot afford to
    save for retirement – carry on working.

    Additionally, comparing the economic performance of the European Union and the USA does not lead one to conclude that America has the more dynamic economy, or that it has performed better in the past or will do so in future. The most important feature of the comparison is neither the growth nor the unemployment record of the EU and the US. It is, rather, that US growth, unlike that in the EU, is funded by a dangerously high mountain of foreign debt.