As the U.S. economy struggles, an austere Europe rebounds

The stark reality of American leaders receiving warnings from their European counterparts about the need to curb spending and government deficits has been accompanied by the rising euro and falling U.S. dollar. On Monday, Aug. 2, the euro soared to a three-month high against the dollar and the U.K. pound reached its highest value in six months.

Policy decisions can and do affect the value of currencies. Look no further for a recent example than the United Kingdom and its new government’s unveiling of a fiscal austerity plan. Within a few months, the British pound has gained more than 11% in value, following a drop in May, after assuaging uncertainty among market observers about whether the U.K. government would address its troublesome deficit.

The International Monetary Fund on July 8 specifically called for the United States to intensify efforts to curb budget deficits. The 185-member international lending agency warned about a potential double-dip recession in housing, continued problems in commercial real estate and risk to the U.S. economy from the European debt woes.