Mon, 12 May 2003

Euro hits record high on U.S. economy fears

Associated Press, Frankfurt, Germany

The surging euro rose above US$1.15 on Friday, reaching a level it hadn't touched since it was less than a month old in 1999 and making many wonder how high it can go.

The 12-country currency reached a four-year high of $1.1535 in Asian trading overnight -- its highest since hitting $1.1562 on Jan. 27, 1999. In Europe, on Friday, the euro cooled off slightly and changed hands at just under $1.15. Late in New York trading, the euro was quoted at $1.1488, down from $1.1493 late on Thursday.

The European currency's yearlong rally has been fueled by investors leaving the U.S. financial markets amid worries about the downturned U.S. economy, economists say. When investors move out of U.S. assets, they must sell dollars, driving down the exchange rate.

But the euro's rise has been so rapid in the past several weeks that it is outpacing economic fundamentals in a self- generating momentum rally, said Dorothea Huttanus, a currency analyst at DZ Bank in Frankfurt.

Traders are now buying the euro essentially because they think it will keep going up, which makes it go up more, she said.

"There are reasons for euro appreciation, yes, but not this dynamic," Huttanus said. "The trend goes on and no one dares to fight the market."

The euro has risen 34 percent against the dollar in the last 15 months, and has shot up by four cents in just the last nine days. The last time it was higher was when it hit $1.1562 on Jan. 27, 1999.

Huttanus predicts the euro will fall by the end of the year. Other economists, citing huge U.S. trade deficits that undermine the dollar, think it will keep going past the all-time high of $1.18 shortly after it was launched in January, 1999.

UBS Warburg and HSBC analysts predict the euro will reach $1.20.

Higher interest rates in Europe have played a role, since they make the euro a more attractive place to park cash. The European Central Bank has been cautious cutting rates, while the U.S. Federal Reserve has slashed them to the lowest in four decades.

Marcus Chandler, chief currency strategist at HSBC USA in New York, said the interest rate differential was a key factor in a world where good investment returns are increasingly hard to find.

"The real driving force is the market's search for yield, and right now yield is not the U.S.' long suit," said Chandler. The ECB's main refinancing rate is an annual 2.5 percent, double the Fed's benchmark federal funds rate of 1.25 percent. Those rates help set private-sector rates.

The stronger euro has sapped the first-quarter earnings of some of Europe's major exporters, since it reduces the value of their dollar earnings overseas when they are restated in euros. Companies such as drug and chemicals maker Bayer, auto giant Volkswagen and pharmaceuticals firm Schering have all cited the stronger euro as a drag on their businesses.

Schering said its sales, which fell 7 percent, would have risen 6 percent without the currency effect.

Still, the euro has a ways to go before it hits the peak against the dollar reached by the German mark in 1995, which traded at the equivalent of $1.46 to the euro. The euro replaced the mark and 11 other national currencies.

For U.S. exporters, however, the weaker dollar is welcome relief that makes their products more competitive overseas.