Europe: Is the euro weak, or is the dollar strong?

Global Finance, Sep 2003

The euro fell below $1.13 in early July, leaving analysts to wonder if the currency's rout was based on optimism about the US economy or disappointment with German economic data.

"We think it has more to do with comparisons between asset classes than with comparisons between countries," says Anne Mills, director of currency research at Brown Brothers Harriman in New York.

"What's bad for bonds, at present, is also bad for the euro," she says. "And the move, obviously, is being amplified by profit taking and by technical positioning."

While the upward correction in the dollar may have further to go, Mills says, it will eventually create a real trading opportunity with a chance to buy the euro at very appealing levels.

Rather than dollar strength, the third quarter could provide more evidence of euro weakness, according to Adrian Schmidt of Royal Bank of Scotland.

"We expect the euro to move down toward $1.10 in the third quarter, but we would not expect a decline much beyond that," Schmidt says. "Longer-term reserve managers are likely to be buyers at the lower levels."

As long as the evidence of global recovery continues, the Swiss franc also looks likely to stay weak, since economic growth in Switzerland is even weaker than in the euro-zone, and yields are lower, Schmidt says.

The yen also suffers from lack of yield attraction, he adds, but the Japanese currency will tend to strengthen against a weak euro if there is any evidence of recovery in Japan.