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Shame Or Fortune

The battered euro is still weak against the dollar but is expected to achieve parity in early 2001.

  The battered euro is still weak against the dollar but is expected to achieve parity in early 2001. The embattled euro, the unified currency the bulk of the European Union hopes will some day rival the dollar, reached its highest level versus the U.S. greenback $1.16 at its debut on Jan. 4, 1999. As the U.S. economy continued to grow at a booming rate and U.S. interest rates were higher than those in Europe, demand for U.S. dollar-denominated assets grew. As a result, the Euro gradually came down to near parity by December 1999. The slide of the euro accelerated last year, as U.S. economic growth continued in the fast lane during the first half of 2000 and the Federal Reserve raised short-term interest rates, while Europes growth slowed down. The Year Of The EuroDespite weak economic activity and high unemployment rates in major European economies, the European Central Bank (ECB), concerned about the impact of rising oil prices on inflation and attempting to stem the falling value of the euro versus the U.S. dollar, embarked on a tight monetary policy that resulted in six interest-rate hikes totaling 2.25 percent.  

With the euro 15.4 percent below parity with the U.S. dollar by Sept. 20, 2000, the monetary authorities in the United States and Japan joined forces with the ECB to intervene in foreign exchange markets to support the euro. Denmarks decision not to adopt the euro as its currency in the September referendum came at the wrong time, and the euros slide versus the dollar continued, falling on Oct. 22, 2000, to its lowest level ($0.827). As the U.S. economy began to slow down sharply in the second half of last year and the U.S. stock market took a dive, the euro began to regain some its value and by the end of December 2000 was only 6.1 percent below parity with the U.S. dollar. The euro is expected to reach parity in the first half of this year. The beleaguered currency, to this point a literal embarrassment to those who pushed for a unified European dollar, is forecast, however, to make significant inroads this year. In fact, some currency strategists are forecasting 2001 to be The Year of the Euro. Gaining On The DollarWith predictions that Europes economic growth will outpace that of the United States, it is likely that the euro could steadily gain strength against the dollar, particularly if forecasters are accurate in their predictions that the long-booming U.S. economy is headed for recession.  
The U.S. economy is forecast to grow at about 2.75 percent in 2001, slower than in past years. Economic growth in Europe, on the other hand, is projected to be 3.25 percent.For now, however, even though the exchange rate creates worry along European fronts, it creates a profit boon for European companies that export to the United States.Many European companies, including some of the worlds largest textile machinery manufacturers, have been able to increase profits in sales to the United States, while holding the line against price increases. To illustrate this incidence, consider that German automaker Porsche has raised prices in the United States by only slightly more than 5 percent since 1996. In Germany, prices have been raised by nearly 7 percent over the same period. Potential GrowthIt is projected that the euro will have profound effects on the stability and growth potential of the world economy, specifically impacting international travel, trade and the pricing of imported goods. The primary goal in switching to the euro is the establishment of a single currency that will unify the European continent along economic lines. This would be a major asset for a continent that accounts for nearly 20 percent of the worlds economic output, but which, monetarily, has been divided. For the textile industry, this will impact machinery suppliers and textile manufacturers alike.

February 2001



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