Europe: Snow's remarkes boost the euro

Global Finance, Apr 2003 by Platt, Gordon

The euro rose to a four-- year high above $1.10 in early March after US treasury secretary John Snow said he was not concerned about the dollar's fall.

"It is easy to conclude that the Bush administration has peeled another layer of armor off the strong-dollar policy," says David Gilmore, partner and economist at Connecticut-based Foreign Exchange Analytics. "If the administration is guilty of anything on the strong-- dollar policy, it is not its hidden desire to change it, but its inability or unwillingness to recognize the vulnerability of the dollar," Gilmore says.

"The dollar could crash, and there is little pre-emptive planning to prevent a crash, much less contain one if it were to break out," he adds.

The main concern is the US current account deficit, which could reach $600 billion this year, according to Michael Rosenberg, head of global foreign exchange research at Deutsche Bank in New York. Exchange rates exhibit a tendency to rise and fall over long-term cycles, often overshooting their purchasing-power parity by wide margins, he says.

Rosenberg predicts that the dollar will continue to fall through 2005, and that the euro will rise to $1.20 by the end of this year, before overshooting to $1.30 or $1.40 after that.

The widening of interest-rate differentials between Europe and the United States will aggravate the financing of the US current account deficit, he says.

"Real short-term US rates are the lowest in the world and probably will get even lower," according to Rosenberg. "Meanwhile, the US has gone from an investment boom to an investment bust and will have trouble attracting foreign capital," he adds.