Several countries in Europe are currently considering adopting the euro, but the evidence on the effects of a currency union on trade is ambiguous at best. I here attempt a new approach to study the effect of a currency union on trade. It is based on the Mengerian justification for currency unions as a means of reducing the transaction cost of cross-border trade. Using a two country DSGE model with diverging interest rate rules. I incorporate a transaction cost on currency exchange to study its effect on trade. The study provides evidence against the Mengerian justification for currency unions. It suggests that the adoption of a common currency should primarily be done for other reasons than attempting to reduce the transaction cost of cross-border trade.