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Friday, 3 December, 1999, 14:51 GMT
When is a weak euro a problem?

trader Traders sell the euro as European governments row over policy

If you are British or American, now is the time to book that European holiday.

The falling euro means that sterling or the dollar should go a long way on the ski slopes.

European exporters should also be rubbing their hands with glee. The weaker euro means their goods are cheaper, and hence more attractive, to buyers around the world.

holiday Holidaying in Europe should be cheaper
For a brief time on Thursday evening and again on Friday morning, Europe's single currency, the euro, was worth one dollar.

Economically, what difference does it make if the euro changes hands for $1.01 or 99 cents?

European policy makers say very little.

By itself, a weaker euro is unlikely to prompt a rate increase, president of the European Central Bank Wim Duisenberg said on Thursday.

Mr Duisenberg says they would only be concerned if the euro did not appear likely to strengthen in the longer term.

No crisis

Many analysts agree. When the euro becomes so weak, that it threatens inflation, then policy makers will start to quake, but that is some time away.

Sustained currency weakness and a higher oil price are needed before inflation becomes a problem, analysts said.

Indeed, some commentators argue that with imports only accounting for about 10% of European demand, the currency would have to collapse before this would happen.

"People trading within the euro zone have got low inflation, low interest rates and stable currencies throughout that zone. If there's any change that's advantageous, a fall in the value of the euro actually improves the export competitiveness of goods manufactured within the euro zone," the pro-European Lord Howe said on Friday.

Indeed, every currency story has two sides and the euro's weakness cannot be viewed in isolation from dollar and yen strength.

The euro weakness can in be attributed to underperforming economies in the eurozone, plus continuing concern about some members' commitment or ability to stick to its rules.

By contrast, investors see the fast growing, vibrant American conomy as a better long term bet.

Divided we stand

Commentators had long predicted that the currency would hit dollar parity.

What finally pushed the euro over the edge was a series of high-profile rows that raised doubts about unity between policy makers.

The UK has long been reluctant to accept an EU-wide withholding tax, fearing it will lead to job losses in the City of London.

Gerhard Schroeder Chancellor Schroeder intervened to help Holzmann
As Gerhard Schroeder said on Friday,: "I make no secret of the fact that I have little understanding for such blockade tactics that place national interest above the necessary European solidarity,"

Earlier in the week, German finance minister Hans Eichel was reported to have said that the British refusal to accept the mooted withholding tax caused euro weakness as it reinforced the impression of a divided union.

Mr Eichel later said his comments had been misinterpreted.

In recent weeks, the impression of an EU practicing different forms of capitalism was reinforced by the collapse of German construction company Philipp Holzmann.

When Gerhard Schroder's social democratic German government stepped in to rescue the company, it raised fears that Germany was sticking to a consensus-driven capitalism.

In one of the sharpest public criticisms the central bank has made of an individual government's policies, ECB president Wim Duisenberg said: "It does not enhance the image that we want to have of being an increasingly market-driven economy across the euro area."

The traders view

Even if economically, the impact of a weaker euro is slight, if infighting and squabbling continue, it could be some time before it regains its strength.

Often, currencies are moved not by hard economic fact, but more intangible factors such as perception and confidence.

Since the euro's launch, parity has existed as a psychological level for many traders.

Traders target different levels in currencies or stocks, placing buy or sell triggers at these levels and dollar/euro parity was one such level.

Fear existed that if the euro broke through the one dollar level, this could trigger a wave of euro selling.

As this hasn't happened - the euro hovers back and forth - it could have the impact of strengthening the $1 level as support.

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See also:
02 Dec 99 |  Business
Euro on the brink
24 Nov 99 |  Business
Europe's level playing field?
25 Nov 99 |  Business
Schroeder saves Holzmann
30 Nov 99 |  Business
Germany denies blaming UK for weak euro
30 Nov 99 |  Business
Q&A: The EU savings tax row
22 Nov 99 |  Business
Hope for Holzmann as loan agreed

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