No real currency yet in talk of 'currency wars'

Following the acrimonious breaking apart of the post second World War fixed exchange rate system, a period of turmoil ensued and the intellectual consensus fragmented. While many economists continued to favour government managing exchange rates in various ways, other believed that market forces should determine rates.

Europeans set up their own fixed exchange rate mechanism in order to limit the negative effects of exchange rate volatility. That eventually led to the abolition of most of the continent’s national currencies and their replacement with the euro.

At the other extreme, the US allowed the dollar to float freely against other currencies and, with the exception of a period in the 1980s, Washington has never explicitly sought to influence the external value of the greenback.

With varying degrees of success, countries have attempted regimes between the two extremes of monetary union and a free float. From setting wide bands within which the currency can fluctuate to pegging the currency rigidly or within very narrow bands and to a “currency board” arrangement, which is the closest thing to full monetary union short of abolishing one’s currency, there are no shortage of options for governments.

If there is any consensus at all on exchange rates among economists today, it is that there is no such thing as a perfect regime.

All arrangements, including monetary union itself, come with sizeable costs and downsides.

Ups and downs Euro's value

Since its launch in 1999, the euro’s value against other currencies has often confounded expectations. In the months before it was introduced, the consensus among traders and economists was that it would appreciate against other currencies. It did the opposite, quickly losing a third of its value against the dollar.

By 2002, as the euro languished, one investment banker famously described it as a “toilet currency”. But just as there were no obvious reasons for its protracted initial depreciation, nor was it obvious what changed around 10 years ago to drive the euro higher. But appreciate it did, against the dollar at any rate. The euro-sterling exchange rate was much more stable.

By the crash of September 2008, an almost uninterrupted appreciation led to its near doubling in value in dollar terms from the lows of 2002.

But despite the epicentre of that crash being in the US, such was the panic at the time that investors felt relatively less at risk in the dollar. The euro fell sharply as a result.

By the end of 2009, it had recovered most of the ground lost post-Lehman. But the outbreak of Europe’s sovereign debt crisis around that time triggered another euro sell off. Since then, the single currency has yo-yoed, driven largely by the waxing and waning of the crisis. Perhaps the most confounding thing about the euro’s value is how high it remains despite very real concerns for its future.