There are two main reasons for the current weakness of the euro. One is the interest rate differential between the dollar and the euro, a gap that was temporarily contracting but is now widening again based on the extraordinary strength of the U.S. economy.
The other is investment in the U.S., which has still not fallen off amid the ongoing shift of funds from the euro to the dollar. In a nutshell, the euro is being undermined by the strength of the U.S. economy. So, if the U.S. economy undergoes an adjustment, will the euro bounce back strongly? The answer is no.
If inflation hits the U.S., it will break the theory of the new economy that preaches growth without inflation. However, if such a situation were to emerge in the U.S. at a time when the euro zone is displaying economic growth of more than 3 percent, inflation would also probably reach a dangerous level from the viewpoint of Germany, Europe's largest economy.
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