At 5 years old, euro easily rivals other currencies


By Matt Moore
Associated Press
Friday, December 29, 2006

The surging euro is confounding critics who once doubted it could rival the dollar, pound, and yen -- but Europe's shared currency still annoys some consumers five years after its introduction in cash form.

In 2006, it has surged in value, rising nearly 14 percent to 20-month highs and is about three or four cents off its all-time high of $1.36 in December 2004. It's a strong turnaround from an initial plunge to as low as 82 cents in 2000.

"When it first started -- and even before it hit markets properly, everyone was very skeptical and negative on the whole thing, and that's exactly the performance we saw," said David Jones, chief currency analyst for CMC Markets.

"That initial negative view is history now," Jones said. "The euro is seen as a strong global currency now."

However, some consumers still grumble about using the euro, with 41 percent of people in the 12-nation euro zone saying they still have difficulties using it, according to a recent Gallup poll for the EU. Many still calculate large purchases in the old currencies.

And having a single currency hasn't closed the growth gap between Europe -- where 1 or 2 percent annual growth constitutes an upswing -- and more dynamic economies in the United States and Asia.

But companies and governments can now raise money across borders with their investors no longer facing the risk that stock or bond holdings will be eroded by exchange rate fluctuations. And travelers no longer have to waste time and money at airport exchange booths, or return home with a pocketful of foreign currency.

The euro -- which was initially introduced on financial markets in 1999 -- has also increasingly gained acceptance as a foreign currency reserve in the coffers of companies and governments from China to the Middle East.

"Indeed, there is the very real possibility that several countries could switch a proportion of their foreign currency reserves out of dollars over time to the euro," said Howard Archer, chief European economist for Global Insight in London.

According to the International Monetary Fund, global foreign currency reserves during the first quarter of 2006 stood at approximately $4.34 trillion. Of that, the dollar accounted for 66.3 percent with the euro, the British pound and the yen accounting for 24.8 percent, 4 percent and 3.4 percent respectively.

In November, China's central bank said it was mulling whether to reduce the weighting of dollars in its reserves. Central Bank Governor Zhou Xiaochuan said his country was "considering lots of instruments to diversify its foreign exchange reserves."

Archer said other countries have expressed similar sentiment.

"Also potentially significant were indications from the central banks of Qatar, Sweden, Russia, and the United Arab Emirates in recent months that they are either diversifying away from the dollar in their foreign-exchange reserves, or considering doing so in the longer term," he said.

On Thursday, the Emirates' central bank governor said the dollar's weakness is prodding his country to convert 8 percent of its foreign exchange reserves into euros.

About 98 percent of the Emirates' nearly $25 billion currency reserves are in dollars. That may decline to 90 percent in six to nine months if the bank's directors approve the switch as is expected, Central Bank governor Sultan Bin Nasser al-Suwaidi said.

Peter Morici, a professor at the University of Maryland School of Business, said the dollar's supremacy, while vibrant, could suffer because of larger U.S. trade deficits and the urge to diversify.

"The euro is the prime candidate for diversification," he said, but added that Europe's struggles to maintain single-digit growth and high unemployment rates would keep the euro from supplanting the dollar as the primary reserve currency.

"Moreover, Europe's trade problems with China, and trade deficits, will grow in the years ahead, casting some doubt on the euro's long-term strength relative to the dollar," Morici said. "Picking the euro over the dollar or vice versa comes down to picking which currency will be stronger two and five years from now. That is a difficult choice to make."

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