Dollar, yen, euro: How weak is the euro today?

When the euro was created, the motive to diversify risk between euro-zone currencies that previously existed disappeared (for example, investors would hold Deutschmarks to diversify the ir holding s of Italian lira). This led to a fall in demand for euros, compared with the sum of the former currencies, and to a depreciation of the euro’s exchange rate. To assess how weak the euro is today, one must: Adjust the euro’s past exchange rate for this effect; Compare the euro’s exchange rate s against the dollar and the yen with their past values, taking into account the yield spreads between these currencies; Look at non-residents’ holdings of euro-denominated assets and the open position in the euro. We conclude that the euro is only slightly weak compared with what it could be given both its lower interest rates than on the dollar, the risks related to the war in Ukraine and the disappearance of the euro zone’s external surplus. The euro is still quite strong against the yen; non-residents are still increasing their holdings of equities in euros; the net open position in the euro is not negative. There is still significant potential for the euro to depreciate.