Euro takes a dip below dollar parity as Duisenberg declines to intervene
Friday 03 December 1999
The single currency reached parity at 8.47pm UK time and then slipped to $0.9995 before bouncing weakly back to $1.0020. The euro has plunged 16 per cent from its first day of trading on 4 January, when it reached a high of $1.1886. Its previous low was $1.0039, reached last Friday.
The European Central Bank declined to intervene to protect the euro. Wim Duisenberg, the president of the ECB, admitted that he would be worried if the currency did not appreciate over time, although he added that its weakness would not by itself trigger higher interest rates.
The ECB president said that the recovery in the Euroland economies would help to take the currency higher. "Overall, relatively wide growth differentials between the major world economies will give way to a more balanced scenario, thereby underlining the scope for the euro to appreciate," he said.
But Mr Duisenberg added: "Whatever I say, whatever I do, the euro continues its movement, so perhaps I am best advised not to say anything."
The central bank also made a rare attack on Germany, blaming its government for helping to create the image of a Europe hostile to free trade. Separately, an EU official said that statements by Germany's Chancellor were contributing to the euro's decline.
Robert Mundell - winner of this year's Nobel economics prize, whose research prefigured the European single currency - had urged the ECB earlier yesterday to intervene to prevent the dip below parity. He was reported in the Belgian press as saying that a decline below that psychological barrier would erode public confidence in the single currency.
The ECB is not expected to raise interest rates again until the middle of next year, following a half-point rise earlier this month. The bank left rates unchanged after its council meeting yesterday.
A majority of economists believe that the currency will rebound to reach $1.02 in a month's time, according to a survey yesterday.
However, few analysts ever expected it to fall as far as it has in the first place. Michael Dicks, European economist at Lehman Brothers, said: "There is a lot of momentum building in the market, and no sign of resistance from the ECB." He said Mr Duisenberg's comments were "too little, too late", nor was there much chance that the ECB would intervene directly to prop up the euro.
Traders are expected to use today's US jobs market figures as an excuse to drive the euro lower still if, as expected, these show that the American economy is still delivering impressive non-inflationary growth.
Currency analysts at JP Morgan noted in a report yesterday that the euro is now at its lowest in real terms (compared with its component currencies) since 1985, due to the underperformance of the Euroland economies. "At current levels the market is effectively pricing in another decade of consistent US outperformance, which is hardly likely," JP Morgan said.
But many analysts said the hype of the decline was overdone. Some said the dip may have signified little more than a desire by dealers to see $0.9999 light up on trading screens.
Henry Willmore, a senior economist at Barclays Capital, said: "Breaking below parity is like topping 10,000 on the Dow Jones industrial average. It is like the year 2000. It is just another number."
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