Tracking the Ups and Downs of the Dollar Versus the Euro

0 Comments | Insight on the News, Sept 2, 2003

Byline: Jamie Dettmer, INSIGHT

Tracking the Ups and Downs of the Dollar Versus the Euro

Economic recovery in the United States is set to outpace that of Europe this year, prompting some analysts to predict a strengthening of the dollar against the euro as overseas demand for dollar-denominated assets increases. While the U.S. currency continued to fall against the euro in August (making it more competitive), the rate of decline clearly slowed, suggesting that the dollar and the euro may reach parity again by the end of the year.

The only factor keeping the euro high (and therefore less competitive) appears to be the higher interest rates in Europe, the result of the European Central Bank's obsession with preventing inflation. There is little else for investors to cheer about in Europe. Italy's economy, Europe's fourth-largest, has slipped into recession for the first time in more than a decade, and Germany, which has Europe's biggest economy, is flirting with recession.

"The economic data out of the euro zone has been consistently underperforming what we see out of the U.S.," said Alex Beuzelin, head of currency strategy for Ruesch International. He added that the economies of Germany and Italy are "a signal there isn't any clear fundamental reason for investors" to buy the euro.

The dollar is still down 7.4 percent against the euro this year.

But some analysts warn that while U.S. growth accelerated to an annual rate of 2.4 percent in the three months ending in June, the recovery might not produce jobs, denting prospects for a rapid jump in consumer spending. And signs of a weakening of the U.S. recovery could lead to a weakening of the dollar.

That would delight U.S. exporters, whose prices would be made more competitive, but prompt concern among economists. The latter argue a weaker dollar will make it more difficult for the United States to service its current-account deficit. The United States needs about $1.5 billion a day in foreign capital to fund a current-account deficit that widened to a record 5.1 percent of gross domestic product (GDP) in the year's first quarter.

Crunching the Deficit Numbers

The federal budget deficit for this fiscal year will reach $401 billion as a result of tax cuts and increases in military spending, the Congressional Budget Office estimates. The Bush administration predicted a $455 billion deficit in July.

This year's deficit accounts for about 4 percent of the nation's GDP, making it the largest deficit in real dollars, though the 1986 deficit constituted 6 percent of the economy.

Economy Lessons From a Comic Book

Japan's ailing economy needs more than just a change in corporate colors, according to the latest best-seller in Tokyo's business bookstores. What it needs are businessmen with a menacing edge, ones ready to approach their jobs with the same skills as Golgo 13, a fictional hit man who always succeeds in completing a contract.

The management guide advises readers to see as an inspiration Golgo 13, a taciturn assassin who has been the best-selling comic-book hero in Japan for years. The guide claims that Golgo's business techniques would improve anyone's ability to negotiate fees, meet deadlines and not crack under pressure.

No doubt Japanese businessmen will revert to courtly bowing and avoid full Western handshakes. Golgo 13 never proffers his hand to a stranger to do so would inhibit his trigger finger!

Orange Stakes Its Claim as Color du Jour

Until recently, orange was America's least-favorite color, reports Business Life, the lively British Airways in-flight magazine for corporate executives. Successful corporations avoided the color like the plague, as it was "associated with cut prices and discount stores." But now orange, as the magazine notes, is the "happening hue" on both sides of the Atlantic.

The wave of enthusiasm for this unrhymable color began in Europe when mobile-phone operator Microtel decided to rename itself Orange. Market researchers apparently found that the color had "connotations of hope, fun and freedom" and was the "most friendly, extrovert, modern and powerful" word the phone operator could use.

Since then more companies in Europe and the United States have adopted orange as one of its corporate colors. When Glaxo Wellcome and SmithKline merged, they ditched clinical blue and green for a bright tangerine. And Intel has added orange as one of the Pentium 4's marketing colors.

Does orange really make a difference? According to psychologists colors do have an effect. Clinical studies show that red makes the heart beat faster and encourages risk-taking, while pink has a calming affect. At its most basic, orange also is a stimulating color. Dominique Peclers, the founder of a styling consultancy in Paris, told Business Life that there is even more to orange than mere stimulation: "Secondary colors such as orange are seen as nontraditional, as a break away from the establishment. Secondary colors are challenging to use and don't fit so easily into tasteful color schemes. That's why they seem younger and more dynamic, which is the image companies want now."