Tuesday

30th Aug 2016

Euro hits all-time high

  • The euro has reached a new record (Photo: EUobserver)

The euro has again reached a new all-time high against the dollar, reflecting mounting fears over the health of the US economy.

In the past weeks, the European currency soared from record to record. At its highest point yesterday, one euro bought 1.4130 dollars, breaching the earlier record of Friday of $1.4120.

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Nevertheless, the dollar is still above the all-time low against the German mark in 1995, equivalent to nearly $1.46 for one euro.

The rejuvenated euro stands in stark contrast with the all-time low of 0.8252 in October 2000.

The gradual weakening of the dollar, rooted in the continuing existence of an American budget and trade deficit, the so-called "double deficit", began in 2003.

Recently, pessimism about the US economy, exacerbated by the housing crisis and the subsequent interest rate cut by the US Federal Reserve last week pushed the dollar further down.

Forecasts of slowing US growth have increased speculation of additional interest rate trimming, making the dollar even less attractive to invest in.

Moreover, in Europe, the 13-member eurozone economy is showing strong growth, which has led some to speculate that the currency zone has finally shaken off its persistent economic woes, driving currency strength.

The economic impact is ambiguous

The economic impact of the changing exchange rate is ambiguous. On the one hand, European consumers and companies can buy goods more cheaply, which stimulates consumption and curbs inflation. In particular, the offsetting effect on the high dollar-denominated oil prices is considered beneficial.

On the other hand, European exporting companies feel the pinch as they increasingly experience difficulties in selling their – now more expensive – goods overseas.

Fabrice Bregier of Airbus, the pan-European aircraft manufacturer, told French radio station BMF that the high dollar-euro rate means that the company has to cut costs by up to two billion euro to remain competitive.

An increasing number of industries face similar hardships, prompting calls to lower interest rates in order to give exporting companies a level playing field – echoing a call made by French president Nicolas Sarkozy.

It remains to be seen whether the European Central Bank, known for its independent and inflation-driven decision-making, will see the need to slash interest rates.

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