Euro to fall below dollar?

Chris Burford cburford at gn.apc.org
Sun Mar 7 04:01:00 PST 1999


In the interests of theoretical integrity, but because of the importance of the question, I want to forward this article from the Observer this morning.

The unification of the euro this January was a triumph of electronic and political coordination, but its weakness towards the dollar now looks financially critical.

Are these analyses to be believed?

Will the euro fall before the US "bubble" bursts?

Chris Burford

London

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'Euro to sink below dollar' by 2000

By Anthony Browne Economics Correspondent Sunday March 7, 1999

The euro will fall in value to less than a dollar by the end of a year, according to City forecasts. The plunge to below the dollar would have huge political consequences, prompting a crisis of confidence in the new currency, endangering British entry, and hammering UK exporters.

The forecasts suggest the euro could fall to as low as 62p against the pound, compared to its launch value of more than 70p. Traders at one of Germany's top banks have already nick-named it the 'toilet currency'.

When it was launched two months ago, the euro was worth $1.17, and widely expected to rise in value. However, confidence in the new currency has rapidly waned, and the euro has fallen below $1.08, a loss of 8 per cent. Both Barclays Capital and the Commonwealth Bank of Australia predict that the euro will be worth less than $1 by the end of the year.

Jane Foley of Barclays Capital said: 'The market has been forced to realise that the euro can become weak. People have been taking their money out of the euro and putting it into the dollar.'

Traders say there will be a rout if the euro falls much below its present value, precipitating a plunge to below the dollar. Cameron Crise, currency strategist at Warburg Dillon Read, said: 'If people gang up on the euro as they did against the yen, that would push us close to parity. There are signs that we are starting to see that.'

The malaise of the euro against the dollar is a result of unexpected economic decline in Europe, economic strength in the US, and squabbling between politicians and central bankers. Germany's economy, the largest in Europe, has taken a sudden turn for the worse, and is now shrinking. Overall, the Euroland economy is growing just one seventh as fast as that of the US. At the same time, the credibility of the European Central Bank has been undermined by senior German politicians publicly pressing for rate cuts.

If the euro falls below the dollar, it would be a severe blow to the whole single currency project and lead to claims that it has failed, with Germans in particularly concerned that their wealth is being eroded. At its launch, European politicians promised the euro would be a strong and stable currency.

Wim Duisenberg, president of the European Central Bank, last week scotched rumours that he had intervened to support the euro. However, he admitted cause for concern'.

The collapse in confidence in the euro is likely to make it more difficult for the British government to gain public support for scrapping the pound. Nick Herbert, chief executive of the Business for Sterling lobby group, said: 'What's worrying is the underlying lack of confidence in the euro. There's been an 8 per cent depreciation in eight weeks. It's not a great start for a supposed zone of stability.'

The fall of the euro is also making life more difficult for Britain's struggling exporters, who have been hit by the prolonged strength of the pound. The pound has been pushed back up to 2.95 Deutschmarks. Ian Campbell, director-general of the Institute for Export, said: 'It is worrying. We had hoped we'd see the light at the end of the tunnel, but now it looks like we won't.'



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