Greenback Gets Trans-Atlantic Push

May 09, 2008 08:00 AM
by findingDulcinea Staff
by Anne Szustek
Economists in Europe see it in their best interest to prevent the dollar from dropping any lower versus other hard currencies.

30-Second Summary

The dollar is creeping back against the euro, trading Wednesday at a six-week high against the European currency.

The recent upturn may be a sign of relief for Europe. German investor Peter Bofinger said, “The uncontrolled increase of the euro rate vis-à-vis the dollar threatens employment growth in the euro area.”

French Prime Minister Francois Fillon concurs with Bofinger about Europe’s need for a stronger dollar. “We believe that the euro globally speaking is overvalued,” Fillon said.

Stephen Jen, currency analyst with Morgan Stanley, wrote in The Wall Street Journal’s Real Time Economics blog in March that “the European Central Bank will not intervene to support the dollar until its monetary policy” lowers its interest rates, bringing it closer in line with the Federal Reserve’s several rate cuts.

Forex Blog
supports the ECB’s expected plan: “The best-case scenario would be a tightening of US monetary policy simultaneous with a loosening of EU policy.”

But the dollar’s race against the euro would best be run as a marathon rather than a sprint. A fast resurgence would shock commodities markets, which are denominated in dollars.

The oil economies of the Gulf thus have a keen interest in the dollar’s value. The UAE abandoned a plan to depeg its currency from the dollar in March after heavy U.S. pressure. As the country is largely desert, UAE residents rely heavily on imports. Many distributors in the region price their items in euros, causing inflation rates to soar past 10 percent during the first quarter. Similar woes pushed Kuwait to drop its currency’s dollar peg a year ago.

Headline Link: ‘Europe and United States Unite on Stronger Dollar’

Background: The U.S. dollar and its performance versus other currencies

Opinion & Analysis: Is a strong dollar necessary to shoulder the economic load?

Reference: FindingDulcinea’s Web Guides to the U.S. Economy and Investing

Related Topics: Foreign Banks Mull Dollar Buyout; America and recessions


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