The week before last the European Central Bank governing council left the bank’s refinancing rate at 2%, which came as a powerful signal to the world’s economy against the backdrop of the news of a declining dollar. This move could either slow the dollar’s decline or cause it to soar. And this largely determined how the major investors felt about the dollar. The euro hit an all-time record of $1.2892 on January 12. As a result, most of the world’s financial specialists were unanimous in their pessimism about the dollar’s strength. However, after ECB President Jean-Claude Trichet said Europe was concerned over currency market fluctuations, traders felt the ECB could be hinting at a possibility of an intervention (selling some of its foreign currency reserves in an attempt to influence the exchange rate). This somewhat stabilized the dollar exchange rate, and it regained some of its value.
Meanwhile, the US Administration remains absolutely unmoved by the declining dollar at a time when two fundamental factors — a balance of payments deficit and a low Federal Reserve interest rate (1%) — work against the US currency but benefit the US economy.
In his State of the Nation message, President Bush attempted to downplay the declining dollar. Yet, after listening to him, traders adopted a wait-and-see attitude. And only after the meeting of European finance ministers did it become clear that there is no plan to influence the euro, and one should not expect any currency interventions. Investors received this news as a signal to buy the common European currency, and the euro-dollar exchange rate continued to climb, reaching $1.2586-1.2591 per euro on January 20.
Now everything depends on how fast the US economy recovers. But it will be a long time before Europe can convince the world that its motley union is as reliable as the US economy. “Now it is the euro that is jumping around the dollar and not the other way around,” said Federal Reserve Chairman Alan Greenspan. He further pointed out that in the past two years the dollar lost 15% of its real value (on average in 2003 it declined by 31% against the Australian dollar, 30% against the euro, 19% against the British pound, 18% against the Canadian dollar, and 23% against 26 major currencies taken together). This creates more possibilities for US exports and the country’s economy in general. Simultaneously, the stronger euro is hurting European exports by making them more expensive compared to competing goods from foreign producers.
It will be recalled that the situation was quite the opposite not so long ago. When the euro was introduced into circulation it was traded at $1.18-1.19, which looked quite optimistic. In an effort to establish the euro as an international currency Europe’s financial authorities jointly with Japan worked actively against the dollar. Eventually, the US, concerned over its swelling budget deficit and its trade and payments balance, jawboned its major trade partners into discarding their strategy of artificially increasing the dollar exchange rate. As a result, last year the euro gained 19% and the Japanese yen 11%. The latter remains at its record high since 2000. The British pound is at its eleven year high against the dollar. Only China, whose yuan has been pegged to the dollar for the past decade, turned a deaf ear to the requests of the US. As a result, US industry has become surprisingly active. With its weak dollar the US felt so much confidence as to lift limitations on steel imports. This has added to the recovery of the global economy, with GDP growth projections for 2004 at 4.7%. According to Lloyds TSB experts, the eurozone economy in general will grow faster as compared to the negligible 0.4% increase last year, but the pace of recovery in Europe and Japan (projected at 1.7-1.8% for 2004), which struggle with structural problems, will be lagging behind more and more. Thus, on both sides of the Atlantic there are increasingly contradictory attitudes toward the stabilization of currency markets.
It seems things have gone a bit too far. The current situation with the dollar puts the stability of the global economy at risk, since there is a possibility that a gradual decline of the dollar could lead to its precipitous collapse. Meanwhile, US foreign debt, which could reach 40% of the country’s GDP in the near future, is unprecedented for a developed country. Especially nervous are West European experts, who, according to Reuters, have already called the $1.3 per euro exchange rate a pain barrier. The recovering global economy and the dollar declining against most of the world’s currencies have sent oil, gold, and metal prices soaring to record highs in decades.
American experts have offered several scenarios. The first scenario sees the declining dollar stimulating the US economy without triggering major inflation, which would be followed by an overall strengthening of the global economy. The US comes out a winner, and there are no losers. In the second scenario, the euro climbs above the $1.4 mark, which dampens European exports and freezes the economy of the EU. The US and China (taking into account yuan’s link with the dollar) win, while Western Europe and Japan lose. The third scenario pictures a precipitously declining dollar, which hurts the global economy. Foreign investors sell US securities en masse. Everyone loses.
Did you get the message? No one will benefit from a collapsing dollar. The US and the global economic community need a temporarily weak dollar but not a collapsed dollar. Thus, most experts believe the dollar could continue declining until midyear. At the same time, one should expect this process to become more stable and controlled.
Thus, for at least half a year rank-and-file Ukrainians can still expect to earn by buying European currency. For example, euros in cash bought in January 2003 could earn you 22% interest by the end of the year and over 30% interest if deposited in a bank. Earning as much interest this year is unlikely, but one might still attempt to cash in on these trends.
