Euro hits parity with US dollar

After months of market volatility, predictions by Euro sceptics, that the new currency would not hold its ground are proving to be untrue.

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By  Massoud Derhally Published  July 15, 2002

After months of market volatility, Euro-sceptic predictions that the new currency would not hold its ground are proving to be untrue.

For the first time since early 2000, the Euro, that unified currency of 12 European nations, hit parity with the US dollar.

Scandals involving large corporations like Enron, Xerox and World Com who restated earnings figures, have eroded investor confidence and weakened markets in the US. The collapse of the energy giant Enron alone, marked the largest bankruptcy in corporate history of the United States.

“I expect the dollar will go further down in the next two years, where it will cost US $1.25 to buy one Euro and if the US increases the interest rate at this moment of time, it will have a negative impact on the stock market, as that will escalate the cost of production in corporate America and hurt profitability and delay economic recovery,” one economist told ITP.net.

After its launch on January 1, 1999, the euro fell below the US $1 mark early 2000, and hitting a record low of 82.30 in the fall of 2000. The weakness of the US dollar will help US manufacturers and exporters compete better as US products become more affordable because of the difference in currency values.

Muhammad Malick, senior economist at National Commercial Bank in Saudi Arabia, told ITP.net, “Saudi imports from OECD countries including the United States are about 84% of the kingdom’s total imports. But most of the trade is denominated in dollars. The US current account deficit is approaching close to 5% of US GDP. If it does reach 5% of the currency value, then the US dollar which is overvalued is expected to fall about 30% in terms of the trade weighted currency rate.”

The Money Analyst, a monthly publication published by Jeffries, reinforces Malick’s assessment. In the June 2002 edition, the publication quoted a recent study by the US Federal Reserve which showed that the when the current account deficit of an industrial country exceeds 5% of its GDP a currency decline usually follows. The decline typically continues for three years or longer and it leads to an average drop of 40%.

“In early 2002, the US ratio of current account deficit to GDP was slightly more than 4% and a strong rise in imports this year will likely increase the size of the deficit,” Malick said.

The US current account deficit, according to one economist in the Gulf, who spoke to ITP.net on condition of anonymity, could reach the critical level of 5% by autumn 2002. “As a consequence the US dollar can be 10% weaker on an overall basis at year end 2002 compared to one year ago,” said the economist.

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