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Euro on brink of dollar parity
ECB president Wim Duisenberg will have to explain the euro weakness to the markets |
Europe's single currency, the euro, has fallen to a new life-time low against the US dollar, but the European Central Bank (ECB) has told currency markets that it sees no need to intervene now.
ECB president Wim Duisenberg said intervention on the markets was a possibility, but refused to speculate whether the bank was considering this option.
On Thursday morning, one euro bought just $1.0024 on London's currency markets. In later trading, the single currency recovered slightly, before going on the slide again.
By 1800 GMT, one euro bought $1.0033.
The euro has now fallen to a third record low in less than a week.
Mr Duisenberg and the other members of the ECB's governing council, though, appear to be taking a long-term view.
Speaking after the bank's fortnightly meeting in Frankfurt, he said he would be concerned if the euro did not appreciate over time.
Day-to-day movements in the euro exchange rate alone would not be enough to trigger an ECB policy decision, said Mr Duisenberg.
The bank decided not to change its base rate, which currently stands at 3%.
Speculators at the ready
Traders say that the euro's persistent weakness may be just too much for speculators to resist.
The bank has a large cash reserve to intervene on the markets. However, nifty speculators would stand to make a fortune betting against the bank.
In September 1992, the Bank of England provided currency players with a huge windfall when its intervention failed in spectacular fashion.
Weak euro - pros and cons
Technically, it would not have made much of a difference if the euro had dropped another quarter of a cent to reach parity with the US currency.
Psychologically, though, it would have been a huge blow for Europe's single currency, launched just over 11 months ago.
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A weak euro is a two-edged sword. It helps the European economy by making the eurozone's exporters more competitive on the world markets.
At the same time, it drives up the price of imports, particularly commodities like oil and steel.
With unemployment high and inflation still low in many European countries, a weak euro may help aid the recovery.
Benign neglect
The ECB has until now pursued a policy of 'benign neglect' - monitoring the situation, talking up the euro, but refusing to intervene directly in the markets.
It recently raised interest rates by 0.5%, partly to ward off inflation - a move that briefly boosted the value of the currency.
There are many reasons for the drop of the single currency.
Economists agree that the reason for the fall is that economic growth in mainland Europe appears to be less strong than in the United States.
But most projections suggest that the position will be reversed in the next few years, as growth slows in America and accelerates in the eurozone.
Another reason is the difference in interest rates. The ECB's base rate stands at just 3%, while central banks in both the US and the UK have set it at 5.5%.
Another potential factor shaping exchange rates is the merger activity of companies in the eurozone. Earlier in the week Mr Duisenberg said that currency flows to finance acquisitions were partly to blame for the fall of the euro.
The balance of direct investment flows saw outflows outstripping inflows by 86.7bn euros during the first nine months of the year.
The crisis will be seized upon by eurosceptics in Britain. They will see it as further proof that the British should stay out of the project.
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30 Oct 99 | Business Basics |
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European Central Bank |
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30 Nov 99 | Business |
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04 Nov 99 | The Economy |
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Euro-zone rate rise |
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09 Nov 99 | The Economy |
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