The Hindu Business Line : Dollar breaches 1.25 to Euro

For how long will this turbulence continue on the currency market is anybody's guess, but a recession-prone European Union is obviously dreading any further rise of Euro against the dollar.

Brussels , Dec 31

AS the US dollar hit a record fresh low against the Euro and crossed the psychological barrier of 1.25 to one Euro mark on Tuesday, there is growing concern in G-7 financial and business circles about the exchange rate uncertainty.

The European Union is obviously seen taking the brunt of the fall of the dollar. Hence, the exchange rate issues would have a special priority on the G-7 agenda, when it meets in Florida, US, in February 2004.

The dollar has fallen by some forty per cent against the Euro. The Euro has topped the forecasts for the 2003 year-end.

There is much speculation in the currency markets about the future status and value of the dollar against the Euro - the more pessimistic forecast being that the greenback will hit the 1.35 Euro mark in 2004 while the more optimistic perception is that the dollar could be in 1.15 - 1.20 mark against the Euro.

The dollar was at 1.17 level when the Euro was launched two years ago in January 2001, but few would have thought that the single Eurozone currency would gain this much this fast.

Crossing the 1.25 barrier means that the Euro has risen 16 per cent in 2003 and gained some four per cent in December.

The British Pound Sterling has tracked Euro and reached a new 11- year old high against the dollar at $1.770 on Tuesday night.

For how long will this turbulence continue on the currency market is anybody's guess, but a recession-prone European Union is obviously dreading any further rise of Euro against the dollar.

The Eurozone goods and services have become nearly forty per cent more expensive against the goods and services sold in the dollar in the global market place. Freshfears about the all-time high US trade and current account deficit have compounded the crisis. Eurozone's fragile recovery has been affected by Euro's rise as Germany, the world's third largest economy after the US and Japan, is currently faced with prospects of negative economic growth. Germany accounts for over forty per cent of Eurozone's domestic and overseas trade.

A European Central Bank (ECB) official warned that the dramatic Euro rally had `' introduced an element of uncertainty'' into the outlook for Eurozone economy.

The Eurozone comprises 12 EU member states that have adopted Euro as their common currency. Britan is outside the Eurozone.

The silver lining on the otherwise gloomy exchange rate horizon is that Germany - despite the dramatic rise of Euro - continues to report a record trade surplus in 2003, according to figures released on Tuesday. Only ten per cent of the German exports currently go to the US compared with 50 per cent to the Eurozone countries.

The Europeans are also worried by the problem of growing influx of goods from China. The Chinese currency is pegged to the dollar and China may again hit another high trade surplus with the European Union in 2004.

Current estimates indicate that China may cross current two-way trade level with the European Union by about twenty per cent in 2004 if the dollar's decline against the Euro and Japanese Yen continues on the currency markets. China's two-way trade with the European Union is six times larger than India's.

Hence Euro has emerged as one of the biggest surprises of 2003.

There is also much speculation about deflation and global recession, which has somehow not materialised in 2003. The US, Japan and emerging Asian economies - including India and China - have registered impressive economic growth in 2003, despite dollar's decline.

Prominent currency strategists today expect the dollar to continue sliding against the Euro in 2004.

But a minority of influential strategists also expect the dollar to appreciate by ten to fifteen per cent against the Euro in 2004.