Prospects for any sustained rise in the euro appear bleak for the foreseeable future, currency traders say.
Europe's single currency, introduced a year ago, came under heavy selling pressure at the end of last year, falling to 97.66 cents on Wednesday as American investors headed back to the dollar. When ministers from the Group of Seven met in Tokyo on Jan. 22, no mention was made of the currency. It was trading at $1.14 this time last year.
This latest pounding follows a 15% slide against the dollar in 1999. And further weakness is likely, since European officials seem unconcerned by the currency's fall. Investors, traders and businessmen have become increasingly doubtful that the euro can hold its own against the dollar, even after the Federal Reserve and the European Central Bank hiked short-term interest rates a quarter-point last week.
The dollar's strong showing is expected to continue as the American economy powers ahead and U.S. investor sentiment remains bullish for domestic stocks and bonds, currency strategists and traders say.
"Broadly speaking, the longer-term outlook is positive for the euro, but it has quite a battle against the strong dollar," says Eric Nickerson, the New York-based head of foreign currency strategies for the Bank of America. "We expected the euro to come under pressure in the first quarter of this year on the back of the strong U.S. economy. But how it does later in the year is quite uncertain."
"We are waiting to see how much the Fed raises interest rates in the next few months," Mr. Nickerson adds, "and whether this derails the upward run in the stock markets, which currently look relatively calm."
U.S. investors are currently much more concerned about sustained local economic growth and continued productivity than by the threat of a possible rise in inflation, traders say. Oil and commodity prices have room to rise, and if the current productivity levels start faltering, inflation could surface. "However," Mr. Nickerson says, "the dollar is likely to remain strong in the current environment."
Carsten Hils, head of foreign exchange at Standard New York Trading Corp., also expresses reservations about the possibility of any rapid gain in the euro.
Matter of efficiency
"The U.S. economy is so much more efficient than that of the European Union, which means American businesses will continue to grow faster than those in Europe. As such, the outlook for the euro appears bleak," he says.
Forecasts that the European economy will grow by 3% this year are "optimistic," currency traders say, unless a number of structural changes are made.
"There needs to be changes in their tax and banking systems, as well as labor laws, to bring them more in line with international standards and to make them more competitive," Mr. Hils says.
Joanne Thornton of the Schwab Research Foundation in Washington says the 3% forecast is achievable, but Europe will still lag behind the United States. European economic growth came in at 2.1% last year and is forecast at 3.1% for this year, while the American economy grew at a rate of 4% last year and is forecast to gain 3.7%. "So, while Europe's growth rate is rising, it's insufficient to attract a heavy inflow of capital out of the U.S. into the region," she said.
Third-quarter figures from the Commerce Department show that American-owned assets abroad increased by $101.5 billion while foreign-owned assets in the U.S. surged $207.2 billion.
Last year there was much concern that many European and Asian central banks would start shifting their reserves out of dollars and into the euro. These fears never materialized, but Ms. Thornton believes this will happen, albeit very slowly.
Standard's Mr. Hils expects that the euro could fall as low as 92 cents before staging a slight comeback to around 95 cents in the last quarter.
Mr. Nickerson says that with the United States in a presidential election year, carrying a record trade deficit and facing the prospect of an economic slowdown, the euro could benefit from a change in American investor sentiment later in the year. But he declines to put a figure on it.
Schwab's Ms. Thornton is the most bullish on the euro, saying she expects it to strengthen towards yearend as Europe's economic growth becomes evident.
