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. Last Updated: 07/27/2016

Euro Steadily Falling Against U.S. Dollar




FRANKFURT, Germany -- In the two months since the European single currency was introduced, pretty much the only direction it has moved is down.


From a buoyant and technically smooth start-up on Jan. 4, the euro has steadily slipped against the U.S. dollar. The initial exchange rate of $1.17 moved to around $1.08.


The decline surprised most experts and puzzled the overseers of the new currency at the European Central Bank. It could also strain relations with the United States, where government officials now loudly complain that Europe must do more to stimulate world growth. A weak euro makes that harder, because it increases the price of imported goods and diminishes European demand for them.


The euro's troubles reflect a series of economic and political developments that have taken the shine off Europe and its new currency. Economic growth has sharply slowed, particularly in Germany, while the United States has defied expectations with an unrelenting pace of growth.


Some experts and political leaders also warn that financial markets may have been unnerved by the rancorous squabbling among European political leaders over monetary policy, farm subsidies and budget cuts.


"You can't get around the fact that the euro is the economic component of a blueprint for political unification,'' said Graham Bishop, an adviser on the single currency to Salomon Smith Barney. "If you see disarray at the heart of the political process, it ought to make people nervous.''


Many economists argue that the euro will regain its initial strength later this year, though perhaps not before it sinks a little further. But many also concede that their predictions two months ago were simply wrong. "I had to change my view fairly quickly,'' said Ravi Bulchandani, chief currency strategist at Morgan Stanley Dean Witter in London.


Like many others, Bulchandani expected the euro to climb from its starting price of $1.17. Now he predicts that it may sink to $1.05 before it strengthens.


Wim Duisenberg, president of the European Central Bank, suggested in January that he would be comfortable if the euro traded between $1.14 and $1.19. When it dropped below $1.14, Duisenberg acknowledged that he was puzzled, but he did not signal any policy change.


Economists say the euro's decline largely reflects the sharp contrast between American and European growth rates. Industrial production across the 11-nation euro zone declined 0.2 percent in December, the European Commission said in data released last week.


By comparison, the U.S. Commerce Department reported that fourth-quarter growth in the United States increased at an annual rate of 6.1 percent, the fastest in nearly 15 years.


European sluggishness has been notable in Germany, which accounts for one-third of the euro zone's total economy. Last week, the German Chambers of Industry and Commerce said companies now expect the economy to grow only 1.5 percent this year, down from 2.8 percent in 1998. The German central bank already estimated that the economy declined 0.4 percent in December. "There are clouds spreading over the German economy, and the sunshine has disappeared,'' said Franz Schoser, the chambers' managing director.


In Italy, Europe's third-largest economy, things are worse. The Italian government said last week that economic growth last year was only 1.4 percent, far short of its projections.


At the same time, economic expansion has made the United States a magnet for foreign money, increased the demand for dollars and reduced that for euro investments.


"If you look at the two economies,'' said Stefan Schneider, chief European economist for Banque Paribas, "they just seem to be going in opposite directions.''


Europe's uncertain prospects have aggravated the running battle between some of its left-leaning political leaders and the conservative monetarists at the European Central Bank.


Bank officials note that parts of Europe are still growing at a pace they consider reasonable. France is more buoyant than Germany, and economists say it can still grow by more than two percent this year. Spain, Portugal, Ireland and the Netherlands are all growing much faster than that.