Print

Mail

wiki links

No sign of early recovery for the battered greenback

European exporters and US tourists yearning for a stronger dollar may have to wait a while yet, thanks in part to two men: the top US and European central bankers, Ben Bernanke and Jean-Claude Trichet.

A much-hoped-for comeback of the battered dollar may not come until the middle of the year, economists and currency strategists say. That's when economic conditions might lead to a change in central bank interest-rate policy.

The dollar's dramatic dive against the euro last year raised the profile of central banks, particularly in Europe where the European Central Bank (ECB) is a relatively new creation.

Nine years ago, when the euro was created, the ECB was a distant institution known mainly to the financial community. In a 1999 survey, 24 percent of Europeans said they had never heard of the central bank.

Notoriety has grown as pressure to help exporters such as Airbus -- which claims to lose 1 billion euros (US$1.47 billion) for every 10 cent rise in the euro -- has been directed at the ECB by governments seeking a scapegoat.

French President Nicolas Sarkozy even made anti-ECB rhetoric part of his election campaign.

The dollar's 11 percent fall against the euro last year makes Europe an expensive tourist destination for Americans, while giving a competitive advantage to US goods.

On Friday, the euro was trading at US$1.4779. That compares with a record high of US$1.4967 in November and a record low of US$0.82 touched in October 2000.

The dollar's weakness poses a dilemma for Trichet, whose signature appears on all euro bank notes. It helps tame inflation -- by making imported goods cheaper -- in a period where the central bank is faced with sharp rises in food and energy prices.

But the expensive euro is squeezing exporters, and economists question how much lower the dollar can go before the European economy buckles.

While the ECB could intervene in currency markets to prevent excessively rapid exchange rate moves, there is little it can do to stem a long-term trend.

One weapon is interest rates, set by central banks to strike a balance between economic growth and inflation. As well as taming price rises -- the goal of central banks everywhere -- higher interest rates also boost the attractiveness of a currency.

Unfortunately for European exporters, the ECB and the US Federal Reserve's current policy is likely to further depress the dollar, with the Fed leaning toward interest rate cuts and the ECB standing firm and suggesting rates might have to go up.

Worried about the sagging US economy, the Fed is cutting borrowing costs, while the ECB has threatened to raise interest rates to control inflation.

Sickly economic growth in the US combined with an expected cut in interest rates could depress the euro-dollar exchange rate to as low as US$1.50 by mid-year, according to Michael Schubert, a senior economist at Commerzbank in Frankfurt.

To bolster the economy, the Fed lowered its key rate three times last year. Its last cut, on Dec. 11, left the rate at 4.25 percent, a two-year low.

Bernanke pledged on Thursday to slash interest rates yet again to prevent housing and credit problems from plunging the US into a recession.

Meanwhile, in Europe, Trichet struck a hawkish note on Thursday, saying the bank "remains prepared to act preemptively" to keep inflation in check. On Thursday, policymakers voted to keep the benchmark rate at 4 percent.

As the Fed's rate cuts kick in, the US economy should shake off its gloom.

Further stimulation could come from temporary tax cuts, which may be announced by US President George W. Bush in his Jan. 28 State of the Union address.

"2008 should be the year of the dollar," said Andrew Wilkinson, senior market analyst at Interactive Brokers Group LLC in Greenwich, Connecticut.

"So many people are so bearish that it can't go on forever. You can't continually devalue the dollar," he said.
This story has been viewed 786 times.