Outlook: Schadenfreude

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The Independent Online
SOME NATIONAL newspapers less measured in their reporting than The Independent have greeted the decline of the euro in the currency markets this year with gleeful hysteria and "we told you so" triumphalism.

Ah, what a delightful thing is schadenfreude. The City of London is meant to be a sophisticated place, but predominantly Eurosceptic forex dealers know a trend when they see one and have gladly climbed aboard the `trash the euro' bandwagon.

To a sceptic, this is the currency created by the Brussels bureaucrats, the people who said bananas had to be straight and that the Mother's Union couldn't sell jam. Now they are obviously afflicted by poisoned Belgian pate too. Who in their right mind would want to buy this strange new foreign currency?

The herd mentality of Anglo Saxon speculators is one thing, but it is only a part of the story. There are good, fundamental reasons for the euro to have weakened since 1 January. For one thing, as the Bundesbank's Mr Welteke pointed out yesterday, the pre-launch euphoria had been overdone. More important, two core Euroland economies, Germany and Italy, have been far weaker than anyone expected last autumn, while US growth has stayed stronger for longer than forseen.

This week's good news on the German economy should act as a reminder, however, that business cycles roll on. Indeed, the weaker currency is helping the Continental recovery by boosting Euroland exports.

None the less, one day's reprieve on the foreign exchanges is unlikely to mark the end of the downward pressure on the currency. Weaker economic statistics, bad news from Kosovo, a further portfolio shift by holders of euro assets - any of these could push it back on the slippery downward path towards dollar parity. Still, yesterday's bounce back should remind us that there is no such thing as an inexorable decline in a currency.

The currency traders would not keep on selling euros if it were obviously going to lose them money, but it is in the nature of financial markets to over-react. More far-sighted investors should remember that what goes down generally comes back up. The euro will bounce once these early jitters recede and the "new paradigm" euphoria over the US abates.

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