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News > International
Euro dips to lifetime low
February 22, 1999: 10:35 a.m. ET

Clash between Europe's bankers and politicians may be hurting new currency
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LONDON (CNNfn) - Is this the moment when "europhoria" begins to dissolve into "eurofisticuffs"?
     As Europe's newborn common currency dipped Monday to a lifetime low of $1.0970 against the dollar, the fault lines between politicians and central bankers became more apparent than at any point since the euro's launch seven weeks ago.
     The new level marked a 6 percent drop since the euro formally kicked off trade Jan. 3 at $1.17.
     At issue in a growing debate is not so much whether the euro can hold its own as a would-be rival to the dominant dollar. The new currency, analysts say, has already proven its mettle as a worthy competitor to the dollar, with euro-bonds attracting growing legions of buyers, sometimes to the detriment of their dollar-denominated counterparts.
     In another sign of support, the Federation of German Banks said Monday the decline of the euro was more a result of U.S. economic strength and differing forecasts for rate policy than a lack of confidence in the fledgling currency, Market News reported.
     Rather, the differences center on clashing visions over how to pump wind into the sails of Europe's listing economies, without capsizing the euro in the process.
     "The ECB (European Central Bank) is saying that it won't cut (interest) rates because the exchange rate is weak, when in fact the exchange rate is weak because they won't cut rates," said Nick Parsons, a currency strategist with Paribas in London.
     Parsons described what he said is a growing "stalemate" between European politicians who favor a short-term cut in rates and a weaker euro, and ECB officials, led by president Wim Duisenberg, who maintain that the current 3 percent rate is low enough for the time being.
     At a weekend meeting of finance ministers from the world's leading industrialized nations, Duisenberg stressed this view, even as politicians pressed for further monetary easing. But the Group of Seven gathering omitted any reference to the weakness of the euro.
     At the same time, U.S. Treasury Secretary Rubin ratcheted up the pressure on both sides by urging Europe and Japan to act more aggressively to promote growth.
     For Europe, the G-7 debate unfolds against a deteriorating economic tableau of slumping industrial output and soaring unemployment, particularly in France and Germany.
     Politicians, led by figures such as German Finance Minister Oskar Lafontaine, tend to embrace a slightly weaker euro as good for exporters since a weaker currency makes their products cheaper abroad.
     But Europe's central bankers and many economists bristle at what they see as undue political interference in complex monetary policy decisions. The ECB, keen to establish its credibility as the impresario of the euro, is also reluctant to be seen as kowtowing to political pressure to lower interest rates further before it feels the time is ripe.
     Most economists believe the bank will make two further 25 basis-point cuts in the coming months, anyway, to shore up European economic growth.
     "Ultimately, the ECB will lower rates," said Jeremy Stretch, a currency strategist with NatWest in London. "I don't think they wanted to be forced into doing it."
     Stretch said it is still difficult to draw broad conclusions about the euro's performance based on Monday's dip, because "it is a new currency, so it doesn't have a track record." He noted, however, that the euro has already increased liquidity in Europe's markets, with the euro-bond markets performing especially well.
     At Paribas, which has been recommending short positions in the euro to its clients, Parsons said the mood surrounding the new currency at the moment is "universally negative". He likened investor reaction to the recent mood when the dollar slipped to around 110 yen.
     Parsons said he believed the best solution for Europe's long-term growth may be a slightly stronger euro and a weaker interest rate.
     Parsons cautioned, however, against viewing rate cuts as an elixir for boosting currency exchange rates.
     "If interest rates alone determined a currency, then the Russian ruble would be the strongest currency in the world."Back to top
     --By staff writer Douglas Herbert

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Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.