“Euro: A common currency used by many European countries. The euro was established in 1999 when 11 European countries adopted a common currency in order to facilitate global trade and encourage the integration of markets across national borders. Euro banknotes and coins began circulating in January 2002.” (The Financial Dictionary) “The euro was introduced in 1999 and became the official currency of participating nations in 2002. It was intended to remove the exchange rate risk of businesses participating in the EU's common market and free trade association. It has become one of the world's most important currencies. Proponents of the euro state that it is more valuable than the former currencies, while opponents say that it has made goods and services in their home countries more expensive. The euro's ISO 4217 code is EUR.” (The Financial Dictionary) According to the European Commission Euro currency, the euro is currently the single form of money shared by 17 of the European Union’s Member States, this makes up the euro area. The euro was introduced in 1999 and was a major leading step in European integration.
The euro has many major benefits; some of these are the sharing of a common euro currency which is enabling the less expensive and simpler inter-nation trading. This common currency also allows less fluctuations and a lesser risk.
In Global terms the U.S. dollar is the leading currency and now the euro is the second most important with the Sterling British Pound third. (Caxtonfx, 2007)
Monetary policy became the responsibility of the independent European Central Bank, when the euro came into being. The national central banks of the member states have adopted the euro and together they compose the Euro System, with that in mind, ECB is monitoring the euro currency with the guidance and council of all the EU members. International financial markets play a very important role in global business. These firms face many opportunities and threats from monetary systems and financial and capital markets. These organizations can issue securities in euro currency, because it enables the companies to avoid a magnitude of monetary authority regulations and controls and provides opportunities to escape the payment of some specific taxes. This allows tax benefits and interest rate benefits, more importantly the regulatory costs are much less, which enabled firms to raise the money in euro currency markets. The euro currency markets help to avoid many U.S. banking regulations and controls and can also lead to the reduction of the payments of some taxes, thus, the reasons that have led to the growth of the market include the interest equalization tax, U.S. withholding tax on interest received by foreign owners of domestic securities, regulation M and Q, and regulations from the U.S. Office of Foreign Direct Investment (OFDI).
Over time the US dollar has declined heavily against the euro. In fact as of now one euro is equal to $1.57 in the U.S. In economic theory there are four major factors that effectively determine the exchange rate between two different currencies; these include comparative levels of income, the relative inflation rates, comparable interest rates, and the macro policies of the individual governments. More commonly, two factors are cited as the cause of the loss of the U.S. dollar against the euro, interest rates and the macro policy within both the budget and trade deficits. This theory also states that investors should earn the same return for their investments of like risks regardless of the country that the investment was made. If comparable rates are different in two countries, money would be expected to flow into the country which offers the higher return. The greater rate of return would increase the demand for that country’s currency; this will eventually appreciate in value, as reflected in the exchange rate, against other currency. The U.S. short term rates have been at a low for the last 45 years, this is the result of the U.S. Federal Reserve, (FED), setting the discount rate and the fed funds rate at only 1 percent, however, comparable rates in the Euro Zone are at two percent. According to the FED, it sees no evidence of the return of inflation and therefore expects to keep rates at this level for a considerable amount of time. Recently the FED has increased the interest rate, in order to keep the dollar under control.
A trade deficit is defined as “An economic measure of a negative balance of trade in which a country's imports exceeds its exports. A trade deficit represents an outflow of domestic currency to foreign markets.” (Investopedia) It also states that it isn’t necessarily a bad situation because over time it will often correct itself.
A deficit has been reported and growing at alarming rates in the United States for the past few decades. The cumulative U.S. trade deficit in 2003 was an annual record with the $489.4 billion deficit surpassing the previous record of $418 billion that was recorded in 2002. With this in mind, large amounts of the U.S. dollar are being held by foreign nations whom could decide to sell at any time, which by large can drastically drive the value of the currency down. In order to finance the deficit, the government must attract funds domestically and or globally. Market participants fear the size of the deficit governed with the low interest rates discussed above because this could cause some major financing problems. When a government’s expenditures exceed its total receipts, this deficit is created. This is also true with the trade deficit; the budget deficit must also be financed with government borrowing. International finance, today, uses the U.S. dollar as the most common or dominant reserve currency instead of gold, which is worth much more, yet our fiat money is still treated as the world’s gold standard. A country’s central bank must have dollar reserves in order to protect an attack on its currency. The dollar accounts for sixty-eight percent of global currency reserves; this is up by fifty-one percent from a decade ago. However, at the same time we only sell 12.3% of the world’s goods but buy a larger 18.9%, and the world keeps producing products in exchange for a green piece of paper printed in the U.S. The reason behind this fact is that the most essential and needed products, such as oil are all denominated by the dollar. This all came about in 1974 when the Saudi oil cartel agreed to dollars in exchange for American arms. So, in order for foreign countries to purchase the oil they need they have to first buy the U.S. dollar. This is slowly changing and another option has come about, the euro. European banks are petitioning to have the euro accepted as the new world reserve currency, thus there is an alternative available in the form of the euro. According to the EC, the many benefits of the euro are, elimination of exchange rate fluctuations, elimination of the various transaction costs, price transparency, enhanced competition, more opportunities for consumers, more attractive opportunities for foreign investors, and businesses are better able to plan their investment decisions based on the reduced uncertainties. In conclusion, the euro has reduced the cross border risk in the euro zone as it has a single currency. Now Euro as a currency is more flexible and deeper then the currencies like the pound or francs. Before the euro, eighty percent of the world's currency reserves were held in U.S. dollars. This gives the U.S. economy a huge subsidy in that reserve dollars are invested in U.S. institutions or foreign institutions under U.S. control. Now the investor has another option in form of the euro. Some of the subsidy the USA gains would be transferred to the EU and help balance out some of the problems of the present heterogeneous economic structure still in place. The strength of the euro relative to the U.S. dollar might encourage the use of the euro as an alternative reserve currency. Thus, now one has to be dynamic and keep track of both euro and dollar movements to make the future strategy.

References:

Caxtonfx http://www.caxtonfx.com/converter/converterpro.html as retrieved on June 12, 2011 http://ec.europa.eu/economy_finance/euro/our_currency_en.htm as retrieved on June 12, 2011

The Baltic Course Juhan Tere, BC, Tallinn, June 11,2011. http://www.baltic-course.com/eng/baltic_states/?doc=25133

Pollard, Patricia S. “The Role of the Euro as an International
Currency.” The Columbia Journal of European Law, Spring
1998, pp. 395-420.
The Free Dictionary http://financial-dictionary.thefreedictionary.com/Euro+(currency)

Investopedia Trade Deficit http://www.investopedia.com/terms/t/trade_deficit.asp
The Financial Dictionary http://financial-dictionary.thefreedictionary.com/Euro