What 2009, will probably see both EU and US economies enter into recession. So far, the EU has been slow to cut interest rates; it has given greater prominence to the spike in inflation rather than the slowing economy. However, the economic slowdown has been greater than many anticipated in the Eurozone. With oil prices and hence inflation falling, you would expect the ECB to finally relent and allow a significant cut in interest rates. As EU interest rates are cut, there will be less demand for Euros and the exchange rate is likely to fall. The EU is also struggling because of the current high value of the Euro. Using measures of purchasing power, the Euro is overvalued making it difficult for EU exporters. It is hard to see a further appreciation in the Euro because it is already to overvalued. On the US side, interest rates are already low (1%) therefore, it is hard to see interest rates falling much more (US already has negative real interest rates). On the other hand, the US has so far avoided technical recession but, the ongoing credit crunch means that a deep recession is more likely. Will Euro replace US dollar as global reserve currency? Because of the weakness in US economy, national debt, current account deficit, people feel the US economy is standing on the precipice and could collapse. However, many of the problems in the US economy are also replicated in the Eurozone. The EU is not immune from the credit crisis as many banks struggle to survive. Housing markets are even more overvalued in Europe and National debt is higher in many EU countries than US.