Dollar-euro exchange rate: The interaction between the US external deficit and US and euro-zone monetary policies

The dollar/euro exchange rate has two key determinants: The US external deficit; when it is too large, the dollar depreciates; The monetary policy gap between the United States and the euro zone (if monetary policy is more restrictive in the United States, the dollar remains strong). After the COVID crisis, given the US stimulus package, the US trade deficit has become very large; but the United States is expected to end quantitative easing before the euro zone: we will have to wait for the ECB's tapering for the US external deficit to really weaken the dollar This complex dynamics was already evident in the early 2000s, but it was not until 2005-2006 and the hike in euro interest rates that the United States’ large external deficit severely weakened the dollar against the euro.