Euro's rise may be just a flutter

The euro and the dollar represent the oldest undisclosed rivalry between Europe and America. The ramification of the new power of the euro is still to be seen, but the single currency is becoming a symbol of economic and hence political strength for the European Union.

Today, the euro is registering all-time highs against the dollar, and could slowly become the new par international currency. This is a place the dollar safely occupied for at least the last 50 years.

However, the present increase in the euro may represent only a flutter. Since its introduction on January 1, 1999, the euro represented no significant threat to the dollar or American hegemony around the globe, indeed not even a dent.

Until recently, the euro, Europe's common currency, has been on a downward trend. Having been fixed at $ 1.1665 on December 31, 1998, it initially jumped upwards on the first day of trading on January 4, 1999, to $1.1747 but went down thereafter.

The fanfare that accompanied its introduction was short-lived with the single currency diving for cover and registering an all time low of $ 0.8225 in October, 2000. It hovered around this figure until the beginning of last year when euro notes and coins were introduced in 12 European countries.

These are Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Holland, Portugal and Spain. Sweden was waiting for a referendum on the issue and Britain and Denmark chose to opt out, maintaining their own currencies.

The idea of a new single currency across a whole continent is not new; it had been at the back of the minds of the founding fathers who wanted to make Europe a single political, economic and social entity. The idea of a single European currency was first pondered over by Napoleon in the late 18th century.

The idea started to resurface from the 1950s onwards. Today's conception goes back to the 1957 Treaty of Rome that established the European Economic Community which aimed at making the continent a single economic bloc.

However, the single currency issue had to take its turn in the midst of a European movement towards integration. The Single European Act of 1986 and the Treaty of the European Union of 1992 paved the way for an Economic and Monetary Union, better known as the EMU. These laid the foundation for a unified currency. Finally, in a meeting in Madrid in December, 1995, the European Council adopted the name "euro".

The time factor has been dominant in the trend towards European integration which first started in 1953 with the establishment of the European and Steel Community. When the euro became legal tender in January, 2002 - circulated among people in Europe rather than remaining in the confines of financial markets - it increased to 90 cents overnight, a jump of 1.2 cents on the dollar. Such a development showed a prompt regaining of confidence in the new currency.

Indeed, this was the start of the boomerang process we are witnessing these days. The hype in euro/dollar activity and the competition between these two currencies appear to be assuming heightened levels in money markets and among exchangers internationally and in the region. In the beginning of last year, the euro not only inched towards parity with the dollar but surpassed it.

It has not only reached its opening levels, but went up to 119.14 at the end of last month before sliding back. However, it continues to maintain a sliding momentum. As of Tuesday, it stood at 117.86. Experts are confident that the euro is set to climb to $ 1.25 by the end of the year.

There has been lots of speculation about what this will mean for Europe, the U.S., the global economy and countries of the region. Europeans are not sure whether they should feel happy or anxious about a strong euro. The fact a strong euro may symbolically signal strength for Europe is neither here nor there.

Ordinary people as well as businessmen, industrialists and even politicians in the single currency zone may look at a strong euro from their own points of view. A strong euro for the ordinary man in the street can mean cheaper imports and lower prices, but this could lead to higher spending and, thus, higher inflationary pressure on the local economies. This will be something for politicians to watch out for.

A high euro, on the other hand, may mean exports become more expensive for industrialists, lowering demand from overseas customers and negatively affecting local production.

Such a situation could be in favour of a cheap dollar and thus good for the U.S. economy as more and more buy from them because of their cheaper exports, hitting European production as a result.

To the onlooker, a run on the dollar might be seen as disastrous especially when one considers that the dollar has fallen by 13 per cent since the beginning of this year. Within the last 12 months, it fell by 29 per cent overall and by 14 per cent against a basket of currencies.

However, American administration officials don't seem to be too bothered about the trend, although they stress U.S. President George W. Bush is committed to a strong dollar. Such a view was reiterated at the G8 summit in France this week. However, there seems to be economic confusion in the administration.

John Snow, U.S. treasury secretary, appears to have said in earlier comments that the American administration doesn't favour a strong dollar because it is not good for exports.

He merely sees the fall as a "fairly modest re-alignment of currencies", as the Economist points out.

But what about the global economy and how does it fare in the present Euro/dollar hiatus? Speaking of the surge in the euro, the Economist says the "currency's strength" (is not) a reliable indicator of international confidence; despite the dollar's slide, few doubt that America's economic prospects, short- and medium term, are better than Europe."

While this may be true, a cheap dollar and a high euro could very well hit the developing countries in their pockets. A cheap dollar means prices of their imports become higher and their exports cheaper.

So while America may bask in the limelight of a cheap dollar, the oil-exporting countries, for example, have a rough deal because of lower earnings and because of the fact they have to pay more for their imports. This could mean higher inflation in the short- and medium-terms as prices of goods and commodities go up.

One local columnist suggested the Gulf economies should now really consider shifting to the euro in their foreign trade, because they end up losing when the dollar goes on a downward spiral. Malaysia and Indonesia are interesting examples of countries that switched to the euro in their oil price structure because of the dollar fluctuation.

For these countries a high euro not only means more revenues but greater international stability which is good for them at least.