Europeans wary of euro's strength

Forex markets in the three parts of the globe were nervous this week, with the European single currency, the euro, rising in value to the level close to initial value at its launch in January, 1999.

By the end of the last trading day of the week, politicians as well as economists became concerned about the rise of the euro against the yen and dollar. On weekly average, the euro added 2.5 per cent to its value against the U.S. dollar, reaching $1.15, close to its launch value of $1.17.

The euro began the rising trend against the dollar before the war on Iraq, with investors' uncertainty of the impact the war would have on the American currency and macro-economic indices of the largest global economy not encouraging.

The war ended as widely anticipated, with a quick decisive victory for the Americans. Then focus was shifted again to the internal issue of the U.S. economy. The dollar didn't improve as was previously assumed to happen.

Bank of Japan (BoJ) had to continue intervening in forex markets to keep the yen value lower, to avoid harming exports which amount to 11 per cent of the economy. In the first three months of the year, BoJ sold yen for more than $20 billion to keep the yen over 117 against the U.S. dollar.

The UK pound sterling didn't show any significant improvement in average in twelve months. Euro benefited from all these developments to reach 135 yen at some point in the week.

Towards the end of the week, the British manufacturing index for March, the month of the war, showed a 0.4 per cent drop, putting more pressure on the pound; so the euro came close to GBP 0.72.

On an annual basis, the euro rose 26 per cent against the U.S. dollar, and 16 per cent against the yen.

After the European Central Bank (ECB) decision to leave interest rates as it is at 2.5 per cent (double that in the U.S.), remarks by ECB chief Wim Diesenberg that he didn't see any excessiveness in the euro value so far fuelled a rush to buy euros everywhere, further raising its value against main currencies.

Most analysts in major financial and brokerage institutions began revising their estimates for the euro value, with some expecting it to settle at above $1.10 up to fall of this year. This shift of more confidence in the single currency is reflected not only in the forex market but in the bond market as well.

From 1995 to 1999, company bonds and sovereign bonds in U.S. dollars amounted to 53 per cent of the bond market, with only 20 per cent in currencies of twelve euro zone countries. Now bonds in euro reached 44 per cent of the market, while bonds in dollars scaled down to 48 per cent.

Europeans know for sure that the rise in their single currency's value doesn't reflect a bright picture of their economies. Rather, it reflects a gloomy picture of the U.S. economy.

The main economy in the euro zone, the German economy, along with the French and Portuguese, suffer a budget deficit over three per cent, exceeding the limit set by euro zone monetary policy-makers.

Though European economies face a lot of difficulties, those facing the American economy are more problematic to let the dollar heed up.

For example, America had to borrow $1.5 billion daily to cover a current account deficit that reached $139.9 billion in the fourth quarter of last year.

During that period, euro zone countries had a current account surplus of 24.5 billion euro.
Current account is the main measure for trade in a country's books.

Europeans fear that continuing uptrend in their currency's value negatively affects competitiveness of their exports, especially to the American market which absorbs the main bulk of European exports.

For instance, a 10 per cent rise in euro value takes European companies' profits down by four per cent.

In two years, the sustained currency strength of that level would mean downgrade of GDP growth by between 0.6 per cent and 1.1 per cent.

For the German economy, estimated to grow only 1 per cent this year, such growth downgrade would be economically disastrous.

Some optimistic analysts argue that the strength of the single currency would push consumers in euro zone countries to spend more, with the buying power of the Euro increasing. Increased consumer spending is a very significant factor of growth. Thus, the slowing economies in Europe could grow faster.

Yet, the pain for Europeans is still less than that for developing or under-developed countries who have a lot of their debt traded as sovereign bonds in international markets. Also, those countries who either have their national currencies pegged to the dollar, or have their main export commodities priced in dollars.

Gulf Cooperation Council (GCC) countries, along with countries like South Africa, Turkey and the like suffer a lot of losses for each cent rise in the euro against the dollar.

It may not be a way out now to think of changing to the euro, especially for countries like those of the GCC, Egypt or others.

On Thursday, Malaysian Prime Minister Dr Mahathir Mohammed advised the national energy company, Petronas, to price its oil and gas exports in euros instead of dollars.

Dr Mohammed argued that in that way his country's revenues will increase by almost 25 per cent. The only country which opted to valuate all dealings with outside in euros, instead of dollars, including oil sale contracts, was Iraq under Saddam Hussain almost two years ago. It ended with the dollar and pound capital invading Iraq and ousting Saddam with his financial system.

Apart from the cynicism of the analogy between Mahathir's proposal and Iraq's decision, the Europeans themselves won't welcome such moves by any country. They can't afford further rise in their currency's value; definitely doomed to hurt their economies in a way more bitter than the pleasure of political reward.

The author is an Arab writer based in Qatar.