How Well can Monetary Factors Explain the Exchange Rate of the Euro‪?‬

Introduction During the first five years of its existence, the euro first went through a period of considerable depreciation, which was then followed by an equally remarkable period of appreciation. The first studies on the exchange rate of the euro tried to examine whether the decline in the value of the euro could be explained by movements in the underlying fundamentals. The majority of the publications suggested that the euro was undervalued on the basis of a number of benchmarks. Despite the strengthening of the euro vis-a-vis the U.S. dollar during the period 2002-03, the question remains on how much of the development can be explained by fundamentals and what the equilibrium value of the euro is.