Mittwoch, Dezember 06, 2006

Euro / US-Dollar

How far will the US-Dollar fall against the Euro. And what sense would it make for oil-exporters to sell their product in Dollars to Europe, with a Dollar consistently lower than the Euro? And when will the central banks in Asia start to unload more and more USD and shift their reserves to other currencies?
Maybe an optimistic scenario by Newsweek. There might be a tipping point after which the slide cannot be controlled anymore.

Reveling in the Euro's Power
Forget the U.S. dollar. Up, down—who cares? If America catches a cold, Europe barely sniffles.
By Emily Flynn Vencat
Newsweek International

Dec. 11, 2006 issue - The crowds mobbing new York's most famous toy store buzz in European accents this year. Inspired by the rise of the euro—which shot up an additional 3 percent last week, to a 20-month high of $1.32—the Germans, French and Spanish are making transatlantic trips to stock Santa's sack at FAO Schwarz, picking up everything from arcade games to toy trains for what in effect is a one-third discount. No question: Europe is feeling the power of the euro, and enjoying the fall of the dollar.

Sure, France's Finance minister, Thierry Breton, called for "vigilance" against the rising euro, lest it undercut European exports. But Nout Wellink, the head of the Dutch central bank and a member of the European central bank's rate-setting body, dismissed the French call as a "Pavlovian response" to a development that, in fact, confirms the rising strength of Europe itself. The Paris-based Organization of Economic Cooperation and Development once again lowered its 2007 growth forecast for the United States (to 2.4 percent) and raised its forecast for Europe (to 2.2 percent). It, too, said those trends explain the strengthening euro, which does indeed threaten European exports—but also increases European buying power abroad and dampens inflation and lowers borrowing costs at home. Says Gabriel Stein, senior economist with London-based Lombard Street Research consultancy: "Many Europeans perceive a strong euro as the seal of a strong Euroland economy. It's good news."

Europe's quiet confidence is indicative of how much it has weaned itself off dependence on America over the last few years. To the extent that the euro zone grew at all in 2003 and 2004, it was driven by exports to the United States. Back then, consumer confidence among Europeans was low, and European companies had not yet developed the robust export markets in China and Eastern Europe that they enjoy today. Result: the last time the euro spiked—in late 2004, when it appreciated by 5 percent against the dollar in three months—it was a matter of urgent concern. Jean-Claude Trichet, head of the European central bank, bluntly described it as "brutal." This time, tellingly, he has remained silent. "The underlying fundamentals of the euro-zone economy have improved dramatically over the last few years," says Peter Van Houte, head Europe economist for ING Wholesale Bank in Brussels.

Europe's strengthening trade relationships with countries other than America give it more balance. European goods exports to America last year totaled €185 billion—up just €5 billion since 2001. But its sales to Asia totaled €244 billion—up €44 billion over the same period. For the first time last year, BRIC nations (Brazil, Russia, India and China) contributed nearly as much to global economic growth as the United States, according to Goldman Sachs, allowing them to offset decreasing demand in America. At the same time, oil-fueled economic growth is making the Middle East a key market for Europe. "The U.S. economy is simply less important for the world economy than it used to be," says Jürgen Michels, European economist with Citigroup in London.

Another reason Europeans aren't too worried is that the euro isn't strengthening as much as the dollar is weakening. Although the euro has climbed by 11 percent compared with the dollar since the beginning of this year, its value against a trade-weighted average of its 23 most important trading partners' currencies—including the British pound and the Japanese yen—has increased by just 5 percent. (Indeed, late last week the British currency hit its highest level against the dollar in 14 years.) "The euro's overall competitiveness matters a lot more than its relationship with a single country's currency," says Matthew Sharratt, euro-zone economist with the Bank of America.

Looking ahead, most economists expect the dollar to keep falling, driven down by America's huge trade and budget deficits. "The best situation" going forward, says Erik Nielsen, chief Europe economist at Goldman Sachs in London, would be that the dollar depreciates further but mainly against Asian currencies, like the Japanese yen and Chinese renminbi, easing the U.S. trade deficit with Asia without undermining growth in Europe. "So far, so good," says Nielsen. "But now we're missing the other leg"—further depreciation against the Asian currencies, as opposed to the euro.

The key benchmark, say analysts, is the psychologically significant price of $1.367 to the euro, which is the record high, reached in 2004. Above that mark, the ECB would have to consider dropping interest rates against its wishes in order to decrease foreign investment in the currency. But short of that, Europeans' increased purchasing power is simply setting the tone for a very merry Christmas, with plenty of American presents under the tree.
© 2006 Newsweek, Inc.


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