Europe hit by fall of US dollar

When Europe's common currency, the euro, reached one-to-one parity with the US dollar this week for the first time in over two years, one might have expected some proud chest thumping on this side of the Atlantic.

In fact, the few cheers that went up were distinctly muted.

The rapidly sliding dollar poses as many problems for Europe as it does for the United States, economists say.

Among the concerns:

• A weak dollar means a strong euro, and that hurts European exports. French cheese and Scandinavian furniture, not to mention steel and automobiles, are now more expensive abroad. Every 10 percent appreciation of the euro knocks a percentage point off the European Union's GDP, say economists at the German bank Dresdner Kleinwort Wasserstein.

• Central European currencies and stock markets are rising quickly – too quickly. That's destabilizing for developing economies.

"The sharp jump in the value of the [Czech] koruna was caused by speculative capital," says Marketa Sichtarova, chief economist at Volksbank CZ. "These are short-term investments .... They are not real businesses," and carry with them the risk of future collapse.

The psychological boost of equality with the world's preeminent currency will soon wear off, they forecast, as the implications sink in.

"The story is dollar-negative, but it is not euro-positive," warns Mikael Schubert, an economic analyst at Commerzbank in Frankfurt.

The heart of the problem is that a higher euro will make exports from the 15- member European Union less competitive on international markets. And for the last three years, it has been exports that have largely driven economic growth in the EU.

The picture is even bleaker in central European countries, whose emerging economies are dangerously export-dependent. The rise of local currencies there against the dollar threatens thousands of bankruptcies and tens of thousands of layoffs, just as the former Soviet bloc nations are finding their economic feet.

European economists have long argued that the dollar was riding artificially high in world currency markets, while the euro slid from its launch rate of $1.17 to a low of 86 cents. That happened, they say, because of the massive migration of international funds to the United States, sucked in by the exuberance of high growth rates and a booming stock market.

That flow masked a structural problem with the US economy – a current account deficit that is due to reach $450 billion this year, requiring $1.7 billion of capital flows each working day to cover it. As this money dries up, the deficit is being revealed, pushing the dollar down.

It is drying up because international investors, frightened by the recent string of accounting scandals in the US, are wondering whether American businesses are really as strong as they appeared. The plunging US stock market no longer looks like a safe place to put money.

And as investors flee dollar-denominated assets, they are turning not only to traditional havens, such as the financial markets in London or Frankfurt, but also to lesser known opportunities, such as the Czech Republic, where the stock market has been performing well.

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