Skip to comments.Euro Hits 2-Year High Against Dollar
Posted on 06/20/2002 11:22:14 AM PDT by Asmodeus
FRANKFURT, Germany (AP) - The euro rose to its highest level against the dollar in more than two years Thursday, climbing above 96 U.S. cents as traders dumped the greenback over fears about the growing U.S. trade deficit and wobbly stock market.
The currency reached 96.45 cents in afternoon European trading, its highest since March 2000, when it traded at 96.53 cents.
New figures that showed the U.S. trade deficit at a record dlrs 35.9 billion in April helped push the euro up from levels just below 95.60 cents early in the day.
"That was the spike that took it over 96," said Nigel Anderson, a currency strategist at RBS Financial Markets in London.
The rally was motivated more by doubts about the dollar than conviction about the strength of the euro and the economies of the 12 countries that use it, he said.
Anderson said the current euro rally looked more solid than earlier ones, in which the currency moved toward parity one euro to the dollar only to fizzle out.
"The longer it continues, the more comfortable people are moving their assets into euros and that reinforces the upward trend," he said.
Trade deficits mean more dollars must be sold to get the foreign currency to pay for imports, driving down the dollar's exchange rate. Until recently, that was offset by foreigners needing dollars to invest in U.S. financial markets support that has waned as stocks have fallen.
A stronger euro makes European vacations more expensive for Americans, but makes it easier for U.S. exporters to compete in Europe. The euro's rise has also lessened inflationary pressures in Europe, giving the European Central Bank more time to wait before raising interest rates.
The euro hit its all-time high of $1.18 shortly after its introduction in January 1999. Notes and coins were introduced in 12 European Union ( news - web sites) countries on Jan. 1.
What struck me when I first read about the 3% deficit rule is that in would incentive each country to increase deficits and employ accounting tricks to hide higher deficits since it would advantage them over the others. Could learn a lot from the Americans. ;)
Anyway, the years when our deficit spending was protected from inflation by dollars being absorbed in the world economy are coming to an end, I think.
Note that the bottom of the graph is 1.00 not zero. A more honest zero based graph would show a less dramatic fluctuation.
Absolutely. The Euro is Deutschemark lite. In effect, the Deutschemark was slightly inflated and the Eurozone adopted it. A fiscal mess up by (for example) Italy, or the admission to EU membership for political reasons of (for example) Poland could devalue it.
A more likely scenario for the Euro devaluation is some major member pulling out over economic regulations not directly related to the currency. Like Brussels trying to dictate the composition of German sausages or French wines. Hell, they even regulate stuff like the shape of bananas, but that doesn't directly impact one member over another.
Alternatively, you could behave as a free man and a rational consumer, buying the quality you desire at the best price, thereby insuring that American industry is subjected to the benefit of competition, and that capital, labor and other resources will tend to be used where they are most productive and therefore competitive, thus raising the wages of American workers, and the returns of American investors, and the standard of living of American consumers.
Of course even if you do your little bit as an individual to lock resources into less productive enterprise by irrational "buy American" descisions, you can at least rest assured that you won't do as much damage to our economy as our own President has done with his recent lumber and steel tarrifs (alas).
A weak dollar helps American manufacturers that export their products. Chew on that for a while . . . .
Thanks Alan Greenspan.
Essentially, it's all from HQ in Brussels, but that doesn't mean it's a all the Belgians. It's mostly French an Germans, with input from all the others.
Seems like it might work fine as long as things are good, but if any of the major countries were disproportionately affected by a recession, there could be trouble.
They are least smart enough to let the Bundesbank people take over the central banking, or did they let the French (or, God forbid, the Italians) do it?
I truly do hope so. But I don't trust the Bundesbank in the long run.
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