Accessibility links

Breaking News

EU/U.S.: Comments In Brussels Cause Brief Respite In Falling Dollar

This week saw a small, brief recovery in the value of the U.S. dollar, sparking hope that the long slide by the U.S. currency may soon end. The drop in the dollar -- and concurrent rise in the value of the euro -- has put Europe's long-awaited economic recovery in jeopardy, and EU finance officials in Brussels this week appeared to take notice. Analysts caution, however, against putting too much hope in a sustained dollar recovery.

Prague, 21 January 2004 (RFE/RL) -- This week saw a brief rise in the value of the U.S. dollar, sparking hope the currency's long slide on international currency markets may be slowing.

Earlier this month, the dollar reached an all-time low against the EU's common currency, the euro, of about $1.30. On 19 January, the dollar staged a modest recovery, rising to about 1 dollar and 24 cents against the euro, before falling back again.

Although the rise was brief, it marked the first dollar rally in months and signaled that sentiments on the U.S. currency may be changing for the better.

The rally was attributed to an EU finance ministers' communique saying that the ministers were concerned by what they called "excessive" recent exchange rate movements. European Central Bank chief economist Otmar Issing repeated the tone of the communique in remarks the following day: "We are not indifferent, but concerned by excessive movements in the exchange rate."

Issing did not say the ECB would actively intervene on currency markets to lower the euro -- by selling some of its euro holdings and buying dollars, for instance -- but his brief comments contained a hint of possible future intervention.

This marked the EU's first attempt to slow the rising euro since the currency first began appreciating against the dollar about two years ago. Until recently, officials had stressed the desire for a "strong" euro in official documents. This week, the word "strong" was noticeably absent.

The rising euro is complicating EU efforts to revive the stagnant 12-nation eurozone economies. A too-strong euro makes the price of EU exports higher. Officials are counting on increased exports to spark any economic recovery.

A strong euro may also encourage EU citizens to buy more goods abroad and therefore spend less of their money at home in local economies.

Steve Barrow is the global head of currency strategy with the Bear Stearns investment bank in London. He explains the dilemma that EU finance ministers and the ECB find themselves in:

"Eurozone finance ministers naturally want to see growth. I think they are concerned that growth will not come if there is no improvement in the trade picture. Obviously, the stronger euro makes it more difficult for eurozone countries to export aboard. And it makes it cheaper for foreign countries to send their exports into the euro area," Barrow said.

The EU's problems with the euro extend to countries outside the bloc, especially in Eastern and Central Europe where currencies are closely tied to the euro.

But Barrow and others are skeptical that any rise in the dollar can be sustained. He tells RFE/RL that the dollar's problems are real and will not go away quickly: "The main problem is that [the U.S.] has a very big trade deficit of somewhere close to 500 billion dollars a year. That's a very big trade deficit in anyone's language. I think the American administration [of President George W. Bush] realized that one way to try to eliminate that trade deficit over time is to reduce the value of the dollar."
"We are not indifferent, but concerned by excessive movements in the exchange rate."

A weaker dollar over time will help redress the U.S. trade imbalance by making U.S. exports cheaper and imports more expensive. It comes at the cost, however, of hurting other countries' economies.

So far, the U.S. appears unconcerned about the drop in the dollar. U.S. officials have mostly refrained from comment, saying only that currency markets -- not government officials -- should determine the value of the currency. Traders have taken this to mean the U.S. will not actively intervene to support the currency and have knocked down the dollar's value accordingly.

Barrow says he's skeptical the EU's verbal intervention will succeed in the long run. He says the dollar could still fall 10 percent to 20 percent in the next year or two. He also says any active intervention on currency markets by the ECB would probably not lift the dollar much without the active cooperation of the U.S. central bank, the Federal Reserve.

He says Japanese finance officials -- facing much the same dilemma as in the EU of a rising currency -- have intervened heavily to shore up the dollar, without success.

"Even when we get to that stage [of active intervention], I would not be hopeful that the eurozone can turn things around [and reduce the value of the euro]. I mean, after all, in Japan, the Bank of Japan has been intervening in truly phenomenal amounts to try to stop the dollar's declining, and that hasn't worked. I think if the European Central Bank tries the same course, it will find it, too, will fail," Barrow said.

Barrow says he believes the real problem is dollar weakness -- not euro or yen strength. If that's the case, he says only the U.S. can reverse the trend.
  • 16x9 Image

    Mark Baker

    Mark Baker is a freelance journalist and travel writer based in Prague. He has written guidebooks and articles for Lonely Planet, Frommer’s, and Fodor’s, and his articles have also appeared in National Geographic Traveler and The Wall Street Journal, among other publications.