European Union

Limp greenback a two-edged sword

PUBLISHED : Wednesday, 24 November, 2004, 12:00am
UPDATED : Wednesday, 24 November, 2004, 12:00am

When Gerda Schmidt visited her travel agency in the southwestern German city of Gaggenau, her agent had good news - the bank accountant's holiday in Yellowstone National Park in the United States next spring was 5 per cent cheaper than it was when she decided to book it in September.

The euro stood at US$1.304 late on Monday, slightly below its record high on Friday. Since its peak in 2000, the greenback has lost 40 per cent against the euro, much to the delight of Mrs Schmidt and other European travellers.

And thanks to the rising common currency, imported groceries are becoming more affordable and prices for heating oil for the quickly approaching winter are falling for the first time in months.

Vehicle producers in Bavaria - BMW being the flagship company in the southeastern German state - are welcoming the sizzling euro to a certain extent, as they buy US$4 billion worth of components in North America every year. A stronger euro means they can get more bang from their buck.

Telecommunications giant Deutsche Telekom took up a significant part of its loans in dollars and now has better terms to service that debt. The same is true for other corporates with big dollar loan portfolios.

Even the European Central Bank can find some good news in the weaker dollar these days as high oil prices, which many analysts in Europe still regard as the biggest threat to the economy, are expected to ease.

But consumers, importers and airlines seem to be the only ones in Europe who are happy about the heavy slide in the dollar.

The ECB welcomes the good news on the inflation front - eurozone prices edged up 2.5 per cent year on year in September - but is facing a dilemma. Fighting inflation would require further interest-rate increases but doing so would push the greenback even lower and burden European exporters.

This is why ECB governor Jean-Claude Trichet labelled the euro's surge as 'brutal' and 'most unwelcome'.

German exports have already lost some steam. The momentum of export growth fell back to 5.8 per cent in September from 13 per cent in August. German car producers earn 20 per cent of their revenue in the US so a weak greenback means their dollar income will translate into fewer euros.

Europe's biggest chemical company, BASF, expects every one-cent reduction in the dollar will slash Euro120 million ($1.21 billion) from its revenues.

The strong euro is already putting pressure on the profit margins of European Union companies, which translates to falling investment, Morgan Stanley economist Eric Chaney warns.

France's economic and finance secretary, Nicolas Sarkozy, has openly complained about the gradual extinction of French export companies and President Jacques Chirac is 'a little worried' about the dollar heading downhill.

France, whose exports for last year slid 3 per cent year on year, is only recently seeing some improvements in overseas receipts, with an increase of 4.9 per cent in the first eight months against the same period last year.

But French food and wine industries, traditional export wellsprings, are struggling with declines in sales as their goods are out-priced abroad.

Leading European statistics authority Eurostat reported just 0.3 per cent growth for the eurozone economy in the third quarter, half of what it notched up in the preceding quarter.

Earlier this month, ECB chief economist Otmar Issing cut his eurozone growth forecast for this year from 2.5 per cent to 2 per cent. Gross domestic product growth in Germany and France, continental Europe's leading economies, stagnated at 0.1 per cent growth in the third quarter.

'The German recovery is as dead as a mouse and the upswing in France hit the wall,' Bear Stearns economist David Brown summed up.