South-Western College Publishing - Economics  
Euro Rises Against the Dollar
Subject Euro
Topic International Finance
Key Words

Euro, Exchange Rates and Economic Growth

News Story

Europe's economic growth has sputtered in recent months as its two largest economies have grown by only 0.1 percent. France and Germany each grew at rates well below expectations compared to the previous three months.

Rising euro values relative to the U.S. dollar create concern viewed in light of the slowing economy. As the euro's value rises, European exports will become more expensive that those from the U.S. and thus the demand for European exports will fall. Exports like Hugo Boss shoes and Mercedes sedans have been driving European economic growth. Without these exports, growth prospects are not good.

The rising euro is really only one of the events that is slowing European economic growth. Rising oil prices increase production costs and manufacturers in France, Germany, and all other European economies will feel these effects. Consumer spending has weakened in the European community.

Recent reports from France showed not only weak exports, but also sluggish consumer spending. "French consumption was extremely strong at the beginning of this year," said Nicolas Sobczak, an economist at Goldman Sachs in Paris. "We knew there would be a correction, but it was deeper than we expected."

While no economists are speaking yet of recession, some are saying that any continued growth is unlikely, in Germany at least. Jorg Kramer, chief strategist at Invesco, an asset management company in Frankfurt, predicts a very real risk that the German economy could fall to zero growth. "I've been labeled a pessimist," he said, "but even pessimists can be overly optimistic."

"We have to accept that we are in a long-lasting dollar bear market that will drive the euro to new heights," said Thomas Mayer, chief European economist at Deutsche Bank. "If it happens in an orderly way, Europe can handle it. If it comes as a shock, it will pull the seats out from under people."

Mr. Mayer and others expect the euro to rise further against the dollar in 2005. The upward movement of the euro will be supported by continuing budget and trade deficits in the U.S., and the reluctance of Asians countries, especially China, to allow their currencies to rise against the dollar. These world conditions leave the euro to bear the bulk of the pressure arising from a weak dollar.

(Updated January, 2005)

Questions
1.

Discuss how the rising value of the euro results in lower exports for the European community.

2. Is a rising euro appreciating or depreciating?
3. Explain how a weak dollar affects U.S. imports.
Source Mark Lander, "In Europe, Rising Euro Gathers Much Angst," New York Times Online, November 13, 2004.

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