Aside from France, euro nations don't mind dollar's fall

Section:

Dollar Falls Quietly;
Aside from France,
Euro Nations Seem
Little Concerned

By the Associated Press
via Baltimore Sun
Saturday, December 2, 2006

http://www.baltimoresun.com/business/investing/bal-bz.dollar02dec02,0,41...

BERLIN -- With the European economy on the upswing, companies and governments are shrugging off the dollar's renewed slide against the euro this week -- a phenomenon once dreaded as potential poison for the continent's many exporters. Companies appear to have made their peace with a stronger currency for the moment, especially in export champion Germany, which is helped by stronger growth at home, currency hedging, and increasingly globalized production practices.

The euro reached $1.3335 in European trading yesterday, up from $1.3250 in New York late Thursday, a 20-month high. The pound hit $1.9805, its strongest close since September 1992, with analysts saying the British currency could reach $2 by the end of the year.

A stronger euro makes American goods cheaper in Europe while making European exports more expensive in the U.S. But European policymakers -- except for the French -- have issued a collective yawn.

"I am not concerned," said Dutch central bank head Nout Wellink. Bernd Pfaffenbach, Germany's deputy economics minister, said the stronger euro "reflects the strength of the European economy" -- but conceded it was not particularly helpful for exports.

Jean-Claude Trichet, president of the European Central Bank, who decried the dollar's slide in 2004 as "sudden and brutal," did not bother to try to talk the euro down. He declined to comment on the exchange rate after a speech Wednesday.

Reasons for the calm are several. Many companies have at least some production in the United States, eliminating exchange rate issues for products sold in the world's largest economy, while others have limited their exposure to currency swings through complex hedging deals.

Stronger economic growth, with the countries that use the euro expected to see expansion of 2.6 percent this year over 1.4 percent in 2005, reduces the pain as people remember that predictions of doom did not come true in December 2004, when the euro hit its record $1.3667.

"People have gotten used to the stronger euro," said economist Christian Dreger at the German Institute for Economic Research in Berlin. "That is the difference from two years ago."

He pointed out that in late 2004, the dollar had completed a dizzying two-year slide from its abnormally high levels in 2000-2002, while the current drop is relatively modest, with the euro rising from levels of about $1.25 for much of the year.

The stronger euro also reduces inflation by making imports cheaper, Dreger added. That in turn reduces the need for the European Central Bank to continue with interest rate increases that fight inflation but can dampen growth.

In any case, European policymakers can do little about the exchange rate except live with it, since rates are determined on the world's trillion-dollar-a-day currency market, blown by the whims of fear and greed. Or, as U.S. Treasury Secretary John B. Connally once famously put it, the dollar is "our currency and your problem."

Economists say the large U.S. trade and budget deficits are putting long-term pressure on the dollar. The most recent dollar slide accelerated after Trichet's comments in October that the European Central Bank might need to raise its key rate from 3.25 percent to combat inflationary pressures from an increasing money supply.

At the same time, expectations have grown that the Federal Reserve may cut interest rates sometime next year. Higher rates in Europe relative to the United States drive the euro up by increasing the yield on some euro investments.

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