Euro may challenge dollar, economists say

Friday, June 14, 2002

FRANKFURT, Germany -- The euro, second fiddle to the dollar since its birth in 1999, may finally be ready to take off, making Italian leather and Parisian cafe cremes more expensive for American tourists but offering relief to U.S. exporters.

Some economists even predict the euro will climb back to parity by the end of the year; a euro was worth 94 U.S. cents Thursday, up from 87 cents in early April.

A further climb would have consequences. Americans would miss lower prices on European goods, whether shopping at home or abroad. Inflation would fall in Europe as imports get cheaper.

And U.S. exporters of everything from Detroit cars to Napa Valley wines would see their wares gain price advantages against foreign competitors.

Economist Stefan Bielmeier at Deutsche Bank in Frankfurt is among those who thinks the euro rally isn't over. "I expect another upward movement of the euro in the near future," he said, predicting the currency will reach 98 cents this year.

Eberhardt Unger at the SEB investment bank predicted the euro will draw level with the dollar, a place it hasn't been since February 2000.

The euro reached $1.18 shortly after its launch in January 1999, but soon slid through the dollar mark to its low of 82.3 cents in October 2000. Since then, the 12-nation money has rallied repeatedly only to fizzle each time.

Growing account deficit

Economists who predict the euro's rise cite the ballooning U.S. current account deficit, the broadest measure of foreign trade, running at $417 billion in 2001.

When Americans buy more imported goods, merchants must get the foreign currency to buy those goods by selling dollars, driving its value down. Until now, that has been offset by foreign investors who get dollars to buy into the U.S. stock market boom, purchase real estate or build factories.

But the party on Wall Street is history, and the current unease over the U.S. economy makes many think the days of the strong dollar are over.

"The U.S. economy is dependent on foreign investors. They must finance the current account deficit," Unger said. "They have done this gladly for several years, but if they do not invest another $420 billion in the U.S., then there could be a problem."

A strong euro wouldn't be all bad for the U.S. economy. The National Association of Manufacturers said the strong dollar has cost $140 billion in lost manufacturing exports over the past 18 months.

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