The Euro’s Newfound Muscle

Throughout the euro’s short life, it has shown a marked tendency to travel in one direction against the US dollar - down.

Shortly after the euro’s introduction in 1999, when it was worth $1.17, it stumbled, then tumbled and kept on heading south. At one point in late 2000 the euro fell to below $0.85 and cries of alarm could be heard all around the continent. It eventually settled down, hovering around $0.89 – playing second fiddle to a strong US dollar that seemed able to weather the ups and downs in the US economy.

But a reversal of fortune seems to be underway, and the euro has surged, rising Wednesday to just over $0.95, its highest point against the greenback in almost a year and a half.

So far in 2002, the euro has risen 6.8% against the dollar.

Economists say the euro rebound is due to uncertainty about the strength of the US economy. Additionally, concerns about the reliability of accounting in Corporate America brought to life by the high-profile case against Enron auditor Arthur Andersen have made investors skeptical about coporate profit reports.

"We are being regaled by stories of dubious accounting practices and we haven’t yet got full sight of the earning recovery that should come with an economic recovery," European equity strategist Andrew Bell told the BBC.

Winners and Losers

There are both advantages and disadvantages to a strong euro.

The European Central Bank is one of the winners basking in the glow of a strong euro. After much criticism, it is finally able to enjoy new credibility these days. The euro rise eases pressure on the central bank to raise interest rates and helps keep Eurozone inflation in check.

The euro’s new strength gives it a political boost as well, especially in euroskeptic countries like Britain and Sweden. Researchers have found that opinions about the euro in the two countries tend to rise as the currency gains against the pound or the krona.

But a strong euro has a negative side. Exporters can lose out, since European goods become more expensive for importers, and exports are less competitive on dollar-dominated world markets.

That has the potential to hurt export-dependent Germany. The country’s Chamber of Commerce has warned that the latest developments could be dangerous for the weak economic recovery that is now underway in Germany. Other economists, however, say those fears are overplayed.

Will It Last?

As the euro continues its climb, it has rekindled hopes that the currency might reach parity with the dollar, a standing it hasn’t enjoyed since early 2000. But those hopes were dampened somewhat when after its Wednesday high of over $0.95, the euro retreated to $0.9417 on Thursday.

Still, previous downturns of the dollar have lasted between 14 and 18 months. If that scenario is repeated, it could take the euro to $1.05 by November. Most say that isn’t likely to happen, but parity with the dollar by the end of the year is considered a realistic possibility.

Michael Lewis, a senior economist at Deutsche Bank, told the Financial Times that this downturn of the dollar and upswing of the euro looks like the real thing, and not a temporary blip.