Abstract

There is little doubt that the making of monetary integration in Europe will have major effects on the exchange markets. Quoting one European currency rather than six or twelve should matter. But how? In which direction should we expect the euro to go? The conventional wisdom is that the euro will be a “strong currency.” For one thing, it should mimic the deutsche mark, typically a strong currency in its own right; second, it should attract new portfolio investors, bidding up its demand and raising its price; and third, it might have to go through a period during which the new monetary authorities will have to demonstrate their willingness to be “tough,” hence appreciating the currency at least for a while.