Investors could be forgiven for wondering what has happened to the euro. Despite many predictions of recovery, it has failed to mount a comeback. The dollar remains king, despite the fact that the US is immersed in talk of a recession.
At first the markets pointed to the European Central Bank's (ECB's) lack of credibility and the confusing messages it was sending. The lack of coherence between ECB board members and senior politicians added to the problems. This issue was resolved to some extent. However, the markets continued to point at the US and its superior growth rates.
In 2000 that was true, but the perceived wisdom was that the currency would have to start pricing in the looming US downturn. But it never happened. The dollar remained buoyant, even as euro-zone growth rates overtook the US.
It is now expected that the US will grow by around 1.4 per cent this year compared with 2.4 per cent in the euro zone. Yet the dollar is at around 15-year highs in trade-weighted terms, despite the collapse in the stock market and the possibility of negative growth rates.
This week the dollar rose again with the euro falling to around $0.88, close to the level at which the ECB and the US Federal Reserve intervened last September.
The new theory is that the markets do not trust the ECB to deliver growth.
The ECB's only mandate is price stability and thus it considers inflation and only inflation. The US Federal Reserve also worries about employment and hence growth is also important to it.
The markets view the ECB as unconcerned about growth but almost neurotic about price inflation. It is therefore punishing it at the moment.
But it is also possible that the dollar is merely acting as a safe-haven currency in a climate of uncertainty. The fact that the uncertainty springs from the US is simply an unhelpful sideshow.
Others point to different theories about Russian and Eastern European criminals exchanging deutschmarks for dollars before the advent of the euro on January 1st, 2002. But as The Economist pointed out, it must be very unlikely that there would be enough criminal money to move exchange rates.
Instead it points to an analysis by Dresdner Kleinwort Wasserstein economist Mr David Owen. He has found what intuitively makes sense: that movements in the exchange rate have closely reflected the differences in productivity between growth in the US and the euro zone.
This holds true for the past decade if the constituent currencies of the euro are used. The currency of whichever area has the higher productivity growth appreciates.
There is even a way of measuring this that shows the relationship has existed for the past 30 years.
If this relationship continues to hold true, there should be some good news for the euro in the short term.
As the US slowdown continues, productivity in the euro zone should be higher than the US and the euro will rise against the dollar.
The problem is what happens after this. If the US economy recovers quickly and productivity returns, it could be still growing at a faster rate than the euro zone. That could mean that the euro would remain under pressure for quite some time.
In the current environment, this may be no bad thing - exporters are still enjoying a considerable boost from the euro's low value. Figures earlier this week, which showed that exports to non-EU states rose by more than 70 per cent in January, only underline this.
However, a weak currency is not good for inflation and it also probably undermines the currency in the minds of many at a critical time in its life.
But as notes and coins come into circulation next January, transparency will become real. Price comparisons will be immediate and competition is likely to intensify. This could have a dramatic impact on the productivity of some regions.
Cross-border competition in the financial arena is also likely to increase, with further mergers and acquisitions becoming more common.
As the Economist noted, if you believe that Europe is becoming more tech-driven, then you place your bets on the euro. If not, stick with the dollar.
