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Dollar Surging Against Key European Currencies

Economy: The euro is also losing ground--bad news for U.S. investors in European stocks.

April 30, 1999|THOMAS S. MULLIGAN | TIMES STAFF WRITER

NEW YORK — The dollar is showing tremendous muscle against European currencies this year, and experts say the trend is unlikely to reverse soon.

Superior U.S. economic performance, higher interest rates and the war in Kosovo all are bolstering the dollar at Europe's expense.

For Americans headed to the continent, it's good news: Their dollars will buy 10% more French francs, German marks and Spanish pesetas than they did Jan. 1.

Indeed, the dollar is nearing its highest levels against key European currencies since the early 1990s.

For U.S. investors, however, the picture isn't so sanguine. An April 8 cut in interest rates by the European Central Bank may help to stimulate growth in the continent's larger economies, perhaps brightening the outlook for corporate profits.

But the cut increased the downward pressure on the new common currency, the euro. As the euro and its "member" currencies fall in value, U.S. owners of European stocks see their shares lose value.

The euro's value has slid more or less steadily to just under $1.06 Thursday from $1.17 when it was introduced amid fanfare Jan. 1.

It has been a painful comedown. The currency union was formed with the hope that the euro would quickly become a strong competitor to the dollar with investors.

During a two-year phase-in period, the 11 nations of the currency union still retain their local currencies for retail purposes, although merchants have begun posting prices in euros as well.

The euro is now the official currency for all financial transactions--bank deposits, stock and bond sales, credit card purchases.

Despite the early optimism about a strong euro, its slide is understandable, said Lawrence L. Kreicher, economist at Alliance Capital Management in New York.

The big Euroland economies--Germany in particular--have registered almost zero growth over the last two quarters, while the U.S. economy has boomed.

Moreover, U.S. short-term interest rates are about 2 points higher than those in Germany, making investors eager to hold dollars.

And the war in Kosovo has only underlined the dollar's role as a safe-haven currency, many say.

European officials have grumbled about the euro's fall but so far have done nothing to stop it. Because the countries' individual currencies are fixed in value against the euro, they now all move in tandem.

If the decline continues, "we would increasingly frown," European Central Bank President Wim Duisenberg said Tuesday.

But halting the slide "takes more than frowning," said Carl B. Weinberg, economist at High Frequency Economics in Valhalla, N.Y.

Weinberg and others say the euro won't become a strong competitor to the dollar until the member nations undergo significant reforms, particularly in labor laws. In Germany, for example, firms are reluctant to hire workers even when badly needed because it is legally difficult to lay people off, Weinberg said.

Unemployment, therefore, remains stubbornly high. Without new hiring, Weinberg added, it is next to impossible to ignite the kind of consumer demand that will sustain an economic upturn and bolster the euro.

Lacking the political will to push through labor reforms, European leaders seek less controversial measures, such as using interest-rate cuts to stimulate the economy.

So far, officials have been willing to let the euro slide, but that could change if the slide turns into a rout, said economist David M. Jones at bond firm Aubrey G. Lanston & Co. in New York.

Jones suspects that "parity"--or the $1 mark for the euro--could be a "psychological threshold" that would provoke the Europeans to intervene by buying euros in the market, to prop up the currency.

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

Dollar Zooms

The dollar has surged in value this year against most European currencies--boosting U.S. tourists' buying power, but worrying European policymakers. The dollar in German marks and Spanish pesetas:

Marks Per Dollar

Thursday: 1.8427

*

Pesetas Per Dollar

Thursday: 156.76

Source: Bloomberg News

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