In the long run, the correlation between the bilateral US dollar to euro exchange rate, and different measures of the effective exchange rate of Euroland, has been rather high, especially when one looks at the effective real exchange rate. As inflation is at very similar levels in the US and the Euro area, there is no need to adjust the US dollar to euro rate for inflation differentials. However, because the Euro zone also trades intensively with countries that have relatively high inflation rates (e.g. some countries in Central and Eastern Europe, Turkey, etc.), it is more important to downplay nominal exchange rate measures by looking at relative price and cost developments. The steady and orderly decline of the US dollar from early 2002 to early 2007 against the euro, sterling, Australian dollar, Canadian dollar and a few other currencies (i.e. its trade-weighted average, which is what counts for purposes of trade adjustment), remains significant. In the wake of the sub-prime mortgage crises in the US, dollar losses escalated and continued to feel the backlash. The Fed responded with several rounds of rate hikes while weighing the balance of domestic growth and inflation fears. When was the last time the EUR-JPY pair was over 150.00? (Have a look at).The fall of the US dollar
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