It is common knowledge that floating exchange rates reflect current events and future expectations; there are many reasons for such continual fluctuations. A brief examination of current events in Europe and the United States illustrates how quickly exchange rates change and what propels them to do so. The article "Euro Falls to 2-Year Low Against Dollar"(Waki, 2005), which appeared in The Moscow Times, succinctly describes the latest exchange rates of the euro and the dollar and the main reasons for these developments.

             As of the early hours of November 10, 2005, the euro fell a quarter percent, currently holding at 1.1750 dollars (Waki, 2005). This is another drop in a series of recent falls; for example, it traded at $1.793 on November 7, 2005 and at $1.787 on November 8, 2005 (Read, 2005). This is an interesting situation as the euro had previously and steadily been appreciating. Naturally, a falling euro signals a stronger US dollar. In fact, on November 8, 2005, 'the dollar rose to its highest level against the euro in nearly two years' (Read, 2005, 1). Some speculate that it may continue to rise depending on political, social, and monetary situations in euro-zone countries.

             The value of a nation's currency is greatly determined by its political stability and policies. In the presence of political uncertainty, a country's currency is likely to depreciate. This phenomenon reflects common sense: one is naturally hesitant to invest in or conduct business with a nation whose political future is unknown. Simply put, in such situations the risks are too great and the vulnerabilities too numerous for an astute investor or businessman. One must not look too far for a current illustration of this principle. In fact, Germany's political uncertainty is one reason for the recent depreciation of the euro. The recent German elections spurred controversy and upheaval when then Chancellor Schröder 'refused defeat' (The Economist, 2005, 53).