Thanks for the mighty dollar

CURRENCIES
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Is the US dollar's impressive rise this year against European currencies likely to push import prices higher and spark accelerating inflation?

Probably not. In fact, with economic growth still well below par across much of the region, it's difficult to see which countries won't benefit from the export growth - and new jobs at companies that sell goods abroad - that dollar strength brings.

"There are facts much more critical to Europe right now than imported inflation," said Thomas Beck, fund manager at Union Bank of Switzerland in Zurich. "In the context of double-digit unemployment and weak domestic growth, they need something to bring economies to life."

In theory, imported inflation is a distinct danger whenever a currency weakens, since it raises the price of imported finished goods and raw materials.

So far this year, the Swedish kronor has fallen more than 11 per cent against the dollar, while the Italian lira and Spanish peseta have fallen more than 10 per cent, and the mark - Europe's anchor currency - has dropped more than 9 per cent.

Even the pound, the best performing European currency against the dollar during the period, has fallen more than 6 per cent since 1 January - though it's still up 13 per cent against the dollar since September.

So far, however, even the Bundesbank can't find much to worry about. On Friday, the German central bank's chief, Hans Tietmeyer, went so far as to say that the stronger dollar doesn't yet present any inflationary risk. Wow.

A couple of factors are combining to make the dollar's climb less worrisome. First, European companies, battling high labour costs and fierce competition in the face of lacklustre consumer demand, are unlikely to pass on all the costs of higher import prices to their customers.

Second, oil prices, a major component of imported inflation in continental Europe, have fallen almost 20 per cent since the start of the year and are helping to offset the effects of a stronger dollar. Prices are expected to drop even further this year

"The continent is operating so far below full steam there's no need for panic on imported inflation," said Alison Cottrell, an economist at PaineWebber International. That said, the dollar will not keep on rallying at the pace it has done so far this year.

Mr Tietmeyer and other policy makers from the G7 leading industrialised nations keep repeating that the dollar's rise has gone far enough. Any rise above 1.70 marks to the dollar is likely to be greeted with more vociferous protests - a possible prelude to full-blown intervention by central banks worldwide. Copyright: IOS & Bloomberg

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