Currency in circulation, the cash changeover and the Euro-Dollar exchange rate

This paper describes and analyses the evolution of euro area currency in circulation in the last years and especially in the run up to the cash change-over. In particular, it revisits the possible effect of the latter on the euro/dollar-exchange rate, which has been emphasised recently in the literature. It is argued that the liquidity management of the eurosystem fully neutralises any reduction of the banknotes in circulation by simply reducing correspondingly the funds provided by banks through its open market operations. The empirical part of the paper applies several statistical tools to investigate the three time series in question (euro banknotes, US dollar banknotes, exchange rate). The main conclusion is that there is very little evidence that the decline of the exchange rate of the euro is due to the shrinking stock of euro currency in relation to the stock of US dollar currency.