–The Euro...The New World Currency?
 

Global currency crisis looms
By: Barry Sergeant

In a rare joint statement, the Frankfurt-based European Central Bank (ECB) and 12 European finance ministers have insisted that the US take steps to at least halt the decline of the dollar, which has been sliding broadly for nearly 36 months.

In the past few days, the dollar has hit fresh multi-year or even multi-decade lows against most currencies, including an all-time (six year) low against the euro at $1,3468, on Tuesday morning. The all-but-official currency war can be traced to November 8, when ECB president Jean-Claude Trichet called the euro’s rise to around $1,30 “brutal and unwelcome.”

That was answered on November 19, when Alan Greenspan, chairman of the Federal Reserve, the US’s central bank, stated that foreign investors were “willing to invest in the US to finance the current-account imbalances so far.” He warned, however, that international investors would reach the “limit” in their desire to finance this deficit and may diversify into other currencies. The US current-account deficit, which comprises mainly the trade deficit, is running at an annualised rate of around $600 billion.

Greenspan continued: “Given the size of the US current-account deficit, a diminished appetite for adding to dollar balances must occur at some point.” The dollar was immediately sold off, with the euro hitting a new record on the day at $1,3050.

In yesterday’s outburst, Trichet and the European finance ministers warned that the dollar’s weakness risks derailing global growth. The joint statement, read out by Dutch finance minister Gerrit Zalm, said: “We are of the opinion that excessive volatility and disorderly movements in exchange rates are undesirable for economic growth.”

The statement suggested possible intervention, in the words: “We will monitor the situation closely.” Greenspan has made it patently clear that any joint intervention to support the declining dollar will most certainly not include the US.

Given the dollar’s persistent slide for just under three years, the writing has been on the wall for some time. On November 2, BCA Research noted how the euro had broken decisively above the key resistance level of $1,246 “and should continue to head higher with the approval of policymakers.”

BCA Research stated that the euro was unlikely “to run into significant difficulties until it reaches $1,35, based on technical, valuation and monetary grounds.”

However, the weak dollar is broadly under fire on most fronts. In a report out of London, investment bank Morgan Stanley yesterday warned that Euroland would witness a recession during early 2005 due to the strengthening of the euro against the dollar. Morgan Stanley said manufacturers in the Euroland region are likely to trim their spending and payrolls in the near term due to the increasing need to remain competitive in local currencies.

For the cynics, the weak dollar is indeed causing havoc across the world. Last week, for instance, the Stellenbosch-based Bureau for Economic Research (BER) said 39% of South African manufacturers have shut down their export capacity permanently. Many manufacturers said they simply cannot compete with the stronger rand.

There is, however, at least one other school of thought. Melvyn Krauss, a senior fellow at the Hoover Institution at Stanford University, puts it this way in today’s Financial Times: “My advice to Europeans is simple: sit back, relax and enjoy the terms-of-trade gains from your currency’s ascent. The soaring euro is not as negative for European growth as many assume because it means the ECB can postpone the higher interest rates it may have had in store.