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EDITIONS
Monday, 15 July, 2002, 16:29 GMT 17:29 UK
Euro breaks $1 barrier
euro dollar graph
The euro and the dollar have reached parity for the first time since February 2000.

The dollar has been falling sharply in recent weeks as investors shy away from US shares and investments due to fears over corporate credibility, and all the while the euro has been gaining strength since the launch of notes and coins at the start of the year.


You cannot judge this on the day to day

UK Prime Minister Tony Blair

The euro remained firm on Tuesday, with one euro buying $1.0074 at 0507 GMT.

The increased pressure on the dollar means its status as a quality investment haven in times of global economic uncertainty - even when that uncertainty was centred on the US itself - now seems to have come under fire.

The wave of accounting scandals that have engulfed firms including energy giant Enron and the telecoms firm WorldCom have led investors to put their money elsewhere.

Testing time

The euro hit its all-time high shortly after its launch at the start of 1999.

But it began to slide there after, falling to a record low of 82.3 US cents in October 2000.

Its newfound strength is thought to reflect investor fears over the dollar, rather than an endorsement of the single currency.

The combination of corporate scandal, falling profits, sliding consumer confidence and a massive imbalance in the money flowing in and out of the US means the US is no longer automatically the best place for investors to bet on.

The US is so deeply in debt to the rest of the world that it needs huge financial inflows amounting to billions every day, and their slowing means more stress for the economy.

On the other hand, the dollar's weakness will increase the competitivity of US manufacturing exporters.

"The value of the dollar had gotten so high that many domestic based producers were unable to compete effectively," said Thomas Duesterberg, head of Manufacturers Alliance/MAPI.

But it makes exports from Europe more expensive.

Holidays for Americans travelling in Europe will also get dearer, in a further blow to the tourism sector.

Markets slide

Monday's weakness was exacerbated by fresh falls on stock markets worldwide.

Wall Street toppled in early trading, building on falls of more than 600 points last week.

The blue-chip Dow Jones index was down almost 300 points or 3.4% to below 8,400, a level which - leaving aside the sharp selloff following 11 September - it last visited in October 1998.

London's FTSE 100 closed down 229.6 points or 5.4% at 3,994.5, the first time the index had closed below 4,000 since December 1996 and the sixth worst one-day fall in its 19-year existence.

The trouble for the US is that investor trust in corporate America - already evaporating in the face of Enron, Andersen, WorldCom, Qwest, Halliburton and other alleged irregularities - faces a key test this week, as Wall Street firms begin to deliver their latest trading updates.

Shareholders continue to fear that more firms will be forced to admit that their reported profits have obscured their true financial position.

Sterling test still stands

In the UK, anti-euro campaigners think the rapidly changing exchange rates make the UK's dilemma over whether to adopt the single currency more difficult.

"Rapid moves in the euro exchange rate are going to make it difficult for the government to claim the five tests are clearly and unambiguously met," said George Eustice, campaign director of the No campaign.

But pro-euro campaigners have taken the opposite stance.

"The instability of all currencies in the modern world is why most countries are choosing to operate as part of, or linked to, larger currency zones," said Matthew Taylor, Liberal Democrat treasury spokesman.

UK prime minster Tony Blair said the euro's rally would have no effect on the goverment's assessment of whether it should join the single currency.

"You cannot judge this on the day to day. It has to be judged according to the economic tests and the convergence test," he said.

 WATCH/LISTEN
 ON THIS STORY
Jeremy Stretch, Royal Bank of Canada
"The US has thrived on foreign inflows of capital, but with the equity markets performing badly the capital has dried up."

Analysis

IN DEPTH
The Markets: 9:29 UK
FTSE 100 5760.40 -151.7
Dow Jones 11380.99 -119.7
Nasdaq 2243.78 -28.9
FTSE delayed by 15 mins, Dow and Nasdaq by 20 mins
Launch marketwatch
View market data
See also:

15 Jul 02 | Business
15 Jul 02 | Business
26 Jun 02 | Business
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