One year later, euro soars against dollar

  • 2003-01-09
  • Breffni O’Rourke
Call it a birthday present for the euro. Exactly one year after the European Union's common currency entered circulation in 12 EU states, the euro hit record highs in early January in value against the U.S. dollar.

That is considerable progress for the euro, which has spent much of its short life emerging from the shadow of the U.S. currency. From the moment it was introduced as an invisible currency for accounting purposes four years ago, the euro has faced an uphill struggle. Amid derisive jeers from skeptics in the political and financial worlds, the euro regularly reached record lows against other major currencies.

But despite its slow acceptance on the market, the euro is now holding strong, with an increasing flow of capital into euro-denominated investments. That move is partly at the expense of the dollar, which has been falling against other currencies as the euro rises.

Ottmar Lang, a currency expert with Deutsche Bank in Frankfurt, said, "The demand for U.S. securities is no longer so high; not that it's necessarily to imply that investors are selling, but apparently the appetite for U.S. dollar-denominated paper is weakening."

Factors influencing the slackening interest in the dollar are the continuing poor state of the U.S. economy and the fear of a U.S.-led war in Iraq.

"The domestic problems [in the United States] are not less serious than they are in Europe — well, in Europe they might be even more serious — so probably it is the geopolitical situation which is currently weighing on the external value of the U.S. dollar," said Lang.

The current appreciation of the euro makes products made in the euro-zone more expensive and therefore less competitive. But at the same time, it helps to keep inflation low by making imports, such as key raw materials, cheaper.

The question of inflation and the euro is a sore point around much of Europe. That's because of the common public perception that retailers, restaurants, and other businesses used the changeover from national currencies to raise prices — illegally — of goods and services.

The Greek daily Eleftherotypia says the euro "brought us closer to the other 11 countries [in the euro-zone, but] ignored the urgings of government officials and was rounded off upwards, sending prices through the roof and making the high cost of living possibly the major issue for the average person."

Inflation in Greece — which stands at more than 3.5 percent — has been above the euro-zone's average, and analysts say this is partly linked to the price hikes.

European Central Bank President Wim Duisenberg said at the close of 2002 that the bank should be "more honest" about the inflationary impact of the euro launch a year ago. He admitted officials were "reluctant" to recognize that the switch-over had indeed led to higher prices.

Meanwhile, London-based analyst Alisdair Murray of the Centre for European Reform said uncertainty remained. One big factor influencing the euro is the poor state of the EU economies. "Of course, the euro-zone economy is not in great shape, to say the least — especially Germany — and a stronger euro could cut off exports at a time when Germany in particular needs all the export growth it can get, so in the medium term, that could prove damaging," said Murray.

Perils aside, the euro, once regarded as a destroyer of national identity, is gaining acceptance throughout the euro-zone. In perhaps the clearest sign of this, Danish Prime Minister Anders Fogh Rasmussen, whose country stands with Sweden and the United Kingdom as the only EU members outside the euro-zone, announced last week he would push for a referendum on joining the single currency in the coming year.

With Sweden likely to vote "yes" on a euro referendum next September, that leaves Britain as the only EU member reluctant to commit to the common currency.