FXStreet Question of the Week

Q) Hi Ed, Having traded forex for quite some time now and make my daily living from it, I find your insight quite enlightening. I would love to hear your comments on the Amero.

Ed Ponsi) Thank you for your question. The Amero is a proposed currency union that would create one common currency for the U.S., Canada, and Mexico, in much the same way that many European countries now share a common currency, the Euro. It's important to note that the Amero currency is currently just a proposal from the private sector, and there is no current legislative push to make this concept a reality. In order to see if this idea makes sense, let's compare the proposed Amero with the Euro.

The European Monetary Union makes a good deal of sense because there were so many different currencies used in Europe prior to the introduction of the Euro. Ten years ago, a tourist visiting Europe might have needed German Marks on Monday, French Francs on Tuesday, Italian Lira on Wednesday, and so on. The expense and effort of constantly exchanging these currencies was a common and accepted part of this experience. Now think about businesses buying and selling goods across these European borders; they constantly had to monitor exchange rates and use financial instruments to protect or "hedge" themselves against unpredictable changes in exchange rates. The introduction of a common currency alleviated the expense and effort of this task, and companies experienced improved profitability as international trade was simplified by the use of a common currency.

Because it would initially encompass fewer currencies and a larger geographic area, the benefits of the Amero would be less dramatic. One proposal sees the Amero eventually encompassing all of North and South America, but the logistics of creating a monetary union between just the U.S., Canada, and Mexico seem daunting enough. For one thing, there is the issue of losing sovereignty over one's own monetary policy. The member countries of the European Monetary Union cannot set their own interest rates and must obey the edicts of the European Central Bank (ECB). Then there is the issue of national pride; many of my friends in the U.K. are staunch opponents of Euro adoption, and this is a sentiment that is widely held throughout that land. Great Britain would have to surrender the British Pound and accept orders from the ECB on interest rates if the Euro were to be adopted, and this is not a scenario that sits well with many in the U.K.

Do Canadians and Mexicans share similar provincial feelings? While the Mexican Peso has been a troubled currency, the Canadian Dollar is one of the current rocks stars of the currency world. In my opinion, Canadians would have to be barking mad to discontinue their autonomy and merge the Loonie with the woeful greenback. In case you missed it, the Canadian Dollar is now worth more than the U.S. Dollar.

Source: FXStreet.com