NEW YORK (Reuters) - Europe's single currency dropped below one U.S.
dollar on Thursday for the first time ever, bruising Europe's pride but inflicting no serious political or economic
damage, analysts said.
Dealers, itching for weeks to test the psychologically key $1.00 level, finally pushed the euro as low as $0.9997
in late afternoon New York trade, down more than 15 percent from its launch at $1.1740 on January 4.
U.S. traders stayed long past quitting time and shouts erupted in dealing rooms as screens
flashed the magic number, but then they quickly bid the euro back above the dollar.
"We've touched parity. It has been done. The historic day has passed," said FleetBoston
currency analyst Paul Podolsky.
There was no specific reason why parity was breached on Thursday, dealers said.
A host of nagging concerns have dogged the euro for weeks and the final blow came as
investors stepped up the shift of funds into U.S. assets, trying the risk from any Year 2000
computer problems, dealers and analysts said.
Investors have long complained about Europe's patchy economic recovery and political
leaders' reluctance to tackle tough corporate reforms, and lack of signs these issues were
being addressed caused a relentless slide in the euro.
Although much hyped, the round number of $1.00 does not signal major economic problems, much less endanger the
11-month old currency's life, analysts said.
"This reflects the malaise that currently persists across the European economy," said Tim Fox, currency
strategist at Standard Chartered Bank. "But it cannot necessarily be called a vote of no-confidence in the
concept of a single currency."
In fact many strategists, agreeing with European leaders who have long said the euro has room to appreciate, now
see this as merely clearing the way for the currency to eventually rebound.
"Breaking below parity is like topping 10,000 on the Dow Jones Industrial Average. It is like the year 2000.
It is just another number," Barclays Capital senior economist Henry Willmore said.
The euro may yet drop to 97 cents before year-end as traders cut their losses, but Chase
Securities economist Chris Widness expects the losses "to be reversed in fairly short order"
when the dollar is likely "to begin a longer term weakening."
Few official voices were heard immediately after the news. Stanley Fischer, first Deputy Managing Director of the
International Monetary Fund, said "I have no idea why anyone worries about this," when asked to comment
on parity.
In the run-up to its January 1999 launch, the euro was heralded as a symbol of the economic and political rebirth
of a continent ready to challenge America for global prominence. But in 11 months, the fledgling currency has defied
widespread expectations it would soon rival the dollar as a premier reserve currency. Instead it has tumbled 15
percent against the dollar and 22 percent against the yen.
Currency traders had tried to reach the psychologically alluring round number for months, nearly touching it in
July and then taking another stab at it in November as trading activity winds down for the year.
More broadly however, the euro's year of decline reflects worries about Europe's economic performance as the U.S.
economy continues to steam ahead and Japan stages a smart recovery.
Even European leaders appeared untroubled by the euro's sharp fall, promising more strong growth in several years
which should lift the euro.
Germany's Chancellor Gerhard Schroeder and France's President Jacques Chirac earlier
this week issued a joint statement saying they were not worried.
The European Central Bank too seemed to play down the issue, warning it could intervene in the markets but gave
no hints it was willing to do so now.
Even ECB President Wim Duisenberg on Thursday appeared to agree it is futile to try and change the market's opinion.
"Whatever I say, whatever I do the euro continues its movement so perhaps I am best advised not to say anything."
And European Economic Affairs Commissioner Pedro Solbes reminded reporters that the
ECB has no exchange rate policy and "so in a sense parity or not parity is not a priority."
In fact, many economists said European leaders may welcome the softer euro as it may fuel
the region's recovery by making exports less expensive.
Looking ahead however, analysts agreed with European officials' forecasts that the euro
has room to appreciate.
"We would expect (the euro's losses) to be reversed in fairly short order and we would
expect the dollar to begin a longer term weakening trend against the euro," said Chase
Securities economist Chris Widness.
Euro
Jumps After IFO; Stocks Still Down
LONDON (Reuters) - Positive interpretations of Germany's influential IFO business
climate index for June revived the euro but gave only a modest boost to leading European
share indices Tuesday.
The IFO report, unveiling a west German business climate index up to 92.9 from 90.5 in May, exceeded
analysts predictions and lent support to the view that the German economy will gain momentum in the second half
of the year.
Currency markets reacted swiftly, pushing the euro to $1.0370, it highest this month, against a background of broad-based
dollar weakness.
July 20, 1999 by Naomi Wimborne-Idrissi
How local businesses can go about actually using the `euro' May 3, 1999 by Charles Dugan
On Jan. 1, 11 European countries introduced a common currency. The "euro,"
as it is commonly known, is now the legal currency in those countries. The currency has been successfully launched,
despite predictions of colossal failure by critics, and almost complete disinterest in the United States.
Does U.S. disinterest mean no impact on American companies doing business in Europe? What opportunities might this
open for U.S. exporters?
There will be important consequences for U.S. companies doing business in Europe. This is true whether a U.S. company
has local operations in numerous European countries, or simply is exporting from the United States to one or more
markets where the euro is now legal tender.
Although some consequences won't be felt right away, others quickly will become apparent. By understanding the
euro's workings, Capital Region companies can gain important advantages over competitors who ignore the new landscape.
A little background on the new currency, how it has been introduced and its likely consequences will enable even
the new exporter to deal comfortably with this phenomenon.
Following are some of the consequences for the U.S. exporter:
While the "soft" introduction of the euro has given some the impression that there will be no impact
on U.S. exporters, that may not be the case for long. The euro likely will:
Increase pressure on U.S. exporters to quote prices and accept payment in euros for sales to customers located
in an "in" country. This is particularly true if the U.S. company has a significant competitor located
in another "in" country.
Your customer and that competitor now are using the same currency. Do you want to make it harder for your customer
to deal with you than your competitor? No, of course not. So be prepared to quote and take payment in the euro.
Force reconsideration of widely divergent price strategies. Many U.S. companies have different pricing strategies
in each European country. Different prices are a reflection of many things: taxes, distribution channels, historical
factors or just "what the market will bear."
Until the introduction of the euro, fluctuating currency rates provided an opaqueness that fostered these pricing
strategies. With the transparency of a common currency, some prices may come under pressure.
Does this mean that your goods must sell at the same price everywhere in the "in" countries? Of course
not. But in the long term, a higher price in one market will have to be a reflection of higher taxes, transport
and other real costs--not just historical practice.
Accelerate the pace of consolidation among European companies. Although the introduction of the euro does not erase
all trade barriers among the European Monetary Union members, it does make it easier for the most competitive companies
to increase their market share across the whole market. Your customers who can't compete may be acquired or leave
the industry. This makes it even more important to develop strong relations with the dominant and most competitive
global or regional players.
It is not difficult to see the euro as an opportunity rather than a challenge. Here are a few steps you can take
to ensure your company is ready:
Make sure your accounting system can accommodate the new currency. Most multi-currency packages have added the
currency. The symbol is "EUR."
Establish a mechanism to accept payments in euros. This could be a euro denominated or multi-currency account with
your U.S. bank or one of their correspondent banks. This makes sense if you have significant business in Europe,
and particularly if you also have suppliers in the EMU. There is a cost to maintaining such an account. If volume
is low you may just want to establish a mechanism whereby your bank will take delivery of euros for your company
and convert them to U.S. dollars.
Because the euro is not fixed to the U.S. dollar, ensure you can manage the exchange risk that will accompany quoting
or taking payment in euros. The best way is to offset euro denominated receipts against euro denominated expenses.
Consider new suppliers in Europe, or even requesting Asian suppliers to quote and take payments in euros. It is
expected that, in the long term, about 35 percent of world trade will be invoiced in euros.
If you don't have suppliers to pay in euros, ask your bank to purchase euros from you on a forward basis. Get an
indicative rate at the time you develop your price quote to an EMU customer. Once you have a firm order with a
known amount, specific shipping date and reasonably certain payment date, the exchange rate can be fixed even if
payment is not expected for months.
Review catalogues and other pricing information, and indicate that prices in euros are available upon request.
Of course, the euro in and of itself will not immediately perk up a generally lethargic economic situation in Europe.
Unemployment remains high, growth is slow, and effective economic measures still need to be developed and implemented.
The euro is a currency, a unit of denomination--not a magic bullet. Nevertheless, a company that can do business
in euros will have a strong advantage in one of the world's richest markets.
Dugan is vice president of international banking
for The Chase Manhattan Bank.
Cracks show in ECB's euro resolve - Some now see intervention as a possibility
Apr 29, 1999
LONDON (CBS.MW) -- After
weeks of watching the euro plummet from its once-lofty highs, there are finally some telltale signs that the European
Central Bank may be ready to stop the currency's fall with a cash intervention.
Launched amid great fanfare at the start of the year, the euro has since fallen some 10 percent from its launch-day
level of $1.6675.
Since that time, investors have been watching to see if the ECB will ride to the euro's support. But Wim Duisenberg,
the ECB's president, has doggedly stood by a policy of benign neglect, saying the euro's weakness was no big deal.
Until this week. In recent days, officials ranging from Duisenberg to the French finance minister, Dominique Strauss-Kahn,
and Yves-Thibault de Silguy, the European commissioner for monetary affairs, have weighed in.
On Tuesday, Duisenberg said he would be concerned if the euro continued to fall in value.
And currency specialists have listened up, saying there's now a distinct chance the ECB will ride to the rescue
if the currency slips to $1.0500.
That's not far from the levels the currency fell to Thursday, when it slipped to $1.0577. The euro's record low
so far has been $1.0561, which it hit April 22.
"It looks like the market wants to see whether the ECB is willing to intervene actively instead of just giving
verbal support. I expect they'd come in at around $1.0500," said Gerd Muller, Frankfurt-based currency strategist
at BHF Bank.
ECB action would need Fed,
Japanese support
If the ECB does decide to take action, analysts believe it would be well-planned, decisive action through cash
intervention in the market.
"It would (have to) be coordinated with European central banks and would need Fed and Bank of Japan support
-- otherwise intervention wouldn't be successful. The risks (to the euro) would be minimal if intervention was
set up in the proper way," said BHF Bank's Muller.
It's believed the ECB has a minimum of $200 billion in reserve that it could use to defend the euro. This is about
the same as the Bank of Japan would have to defend the yen and more than the Bank of England could muster to intervene
on behalf of sterling, if it so desired.
Economic weakness,
Kosovo drive euro down
Some say the euro's free fall is not really such a surprise. "At the start of the year, it was too strong,"
said Peter Von Maydell, London-based senior currency strategist at Credit Suisse First Boston. "It was beyond
what yield differentials would justify. People bought it because it was shiny and new. There were no economic reasons
to buy it."
With the U.S. economy continuing to show signs of strength in sharp contrast to weak economies in the so-called
eurozone, euro weakness is likely to continue. Unless the ECB successfully intervenes, of course. Some say that
reduced gross domestic product forecasts in Europe, and surging U.S. GDP, mean the euro could fall as far as parity
with the greenback.
The Kosovo crisis is also casting a shadow over the eurozone's fledgling single currency.
The proximity of the Western European countries to the crisis has encouraged the flight of assets to the United
States. If the Balkan war escalates further, this could magnify.
