The implications of US and euro-zone saving behaviours for the dollar/euro exchange rate

The United States has a structural savings shortfall; the euro zone has structural excess savings. In the short term, this is compatible with a strong dollar and a weak euro. But in the long term, the United States’ external debt and the euro zone’s external assets will have to stabilise, which will require a trade surplus in the United States to cover the interest on its external debt and a trade deficit in the euro zone to consume the interest received on its external assets. This will require a large depreciation of the dollar and a large appreciation of the euro .