Europe's force de frappe (The consequences of a weak U.S. dollar)

Independent ^ | 04 May 2003 | Hamish McRae

[July 4th]

We would go back to having holidays in Florida because it was cheaper than Spain.

And so would we. At €1.25, flights to Europe will be empty.

[Michael81Dus]

Germanys economy will suffer from a weak Dollar, when one Euro costs more than 1.20 US$. Personally, I had no problems with a weak Dollar, cause that means cheaper trips to the US (already planning my next trip to Hawaii, SF and LA). :-)

Well, let´s wait and see. I don´t believe these so-called experts: they told us last year that the Dollar would cost 1 € at the end of the last year - and in fact it came in July/August. So, their predictions aren´t so great.

Hopefully, Schröders coalition will end in the middle of this year (heavy resistance for his reform proposals within the coalition), then there´s hope that we won´t suffer from a depression.

[AntiGuv]

For whatever reason, this article fails to address the impact to the dollar's status as international transaction & reserve currency standard or to the "safe haven" status of U.S. stocks, bonds, and real estate. I will make this categorical prediction right now: if the dollar were to fall to €1.25 or beyond, U.S. demand will not continue rising faster than European & Japanese demand....

[bert]

Peg the $$$ to the POund and they move in tandem. The Brits get the self esteem and all will be smarmy.

[austinTparty]

Well, for your sake, let's hope that Schröder's coalition manages to break some of the unions' power before it collapses, because a CDU/CDP coalition won't have any leverage to do so. A good dose of FDP reforms wouldn't hurt, but the likelihood of that happening is so close to nil that it doesn't even bear thinking about.

I'm just waiting to see Joschka Fisher become the head of a new EU foreign office once the red-green coalition collapses. That will drive even bigger wedges into the already evident faultlines in Europe...

[fightinJAG]

Thank you. This is what I don't get about France and Germany: they (especially France) want to knock us down a notch, counter our power, which is an amalgation of military and economic might, BUT their whole economy is intertwined with ours. In fact, in many ways the number one influence on their economy is the U.S. economy.

So, HELLO.

[AntiGuv]

BTW, I just realized this article appears to have a curious error worth noting. A $1.25 euro would mean that the dollar had fallen to the €0.80 level, or beyond.. The other valuation statements should be modified accordingly...

[Greeklawyer]

this article is anti-USA even more than it is anti dollar. Remember France and Germany were activly trying to use Iraq to replace the US dollar as the currency that oil is priced with the euro. Right now if you want to buy oil, its priced in dollars. The real question should be who really controls the euro?

[George W. Bush]

Here's the heavy payback for the Weasels. And a "carrot" to keep Blair looking toward the U.S. while keeping Europe less eager for Britain to adopt the Euro. Notice that this will not hit New Europe as hard and will also make trade with us and under the aegis of U.S. economic/military power more attractive. Oh, yeah, and U.S. armaments will naturally become more attractive to our New European allies as well.

This reminds me once again of just how deep and thorough American foreign policy planning has been in the last year. Despite the initial failure at the U.N., it's very thorough in its economic, military, and diplomatic aspects. It's astonishing.

It's the Total Package, baby!

[longtermmemmory]

Oh, yeah, and U.S. armaments will naturally become more attractive to our New European allies as well.
* * * * * * **** * * *

Which is why Germany and France are pushing for the EU only army. This will be a way to force arms sales to the EU. For sale French Jets, taxied once never flown, Pilot seat slightly soiled.

[VOA]

Despite the initial failure at the U.N., it's very thorough in its economic,
military, and diplomatic aspects. It's astonishing.

Just my opinion...but as I told my cousin in Dallas (former Canadian, now
US citizen), Dubya couldn't lose at the UN.
Either he'd convince them (France, etc.) to join up and be the de facto leader
or he'd expose the UN as the dictotor's club it's become.

I'm still in disbelief that the French were insane enough to publically back-stab
their only real friend in Dubya's circle: Colin Powell.

My cousin said that Powell sounded like a whining child when trying to convince
the French to not veto. I told him Powell was getting an education -- and that
it will be interesting to see if he learns from the experience.

[Michael81Dus]

Agreed - and Fischer has "already made his bed" (German saying), he knows where to go when air is getting too hot in Berlin -> Brussels!

[caltrop]

Don't forget higher costs in maintaining our 70,000 GIs and their dependents in Germany. With no mission and a huge price tag, they should have been brought home some time ago.

[Dark Wing]

ping

[WhaChuLookinAt]

In a rational world they would move in much narrower bands and we would create ways of resisting their wilder fluctuations. But we do not live in a rational world/

In a world dominated by free market economies, "rational" would be the apt description. But when a few exercise much power, as they do in ALL major economic powers in existence, there is no rationality - just reaction, deeply flawed forecasting, and poor planning, with an eye toward maintaining that power.

[RedWhiteBlue]

Higher energy prices.

Why? Oil is priced in US dollars. Natural Gas is supplied locally in USD as well. They each have their own independant market dynamics that cause price fluctuations, but the exchange rate of the USD vs. another currency isn't one of those factors. Now if crude oil suddenly switched to trading on a Euro basis, then we'd have a problem.

Higher prices for imports, which we have become dependent upon.

We can do without luxury cars and French wines and cheeses. There are plenty of good alternatives. By far, the imports that we are most dependent upon, the ones that REALLY keep our consumer goods prices down, are Chinese. Since their currency is pegged to the USD, we should see no change in the price of those consumer goods.

American made goods, by contrast, become much more affordable in foreign markets. So it can be a great opportunity to increase our exports.

In fact, for someone with strong Euros that wants to invest in stock, the US stock markets become a very good buying opportunity. We could see a good amount of those strong Euros and other currencies buying into and bolstering our stock market.

[AntiGuv]

I dunno if this was posted on FR, but it's worth reading in the context of this subject:

The dollar nightmare

The drooping greenback is starting to get investors jittery.

By Justin Lahart, CNN/Money Senior Writer

NEW YORK (CNN/Money) - In just a week, the Treasury Department is going to unveil a new $20 bill that's going to use, ahem, a "subtle background color". What the color is going to be is a state secret, but the way things are going for the U.S. dollar lately, the appropriate hue for the Jackson is going to be red.

The red... we mean greenback keeps dropping and in some investing circles this is causing increasing alarm. Thursday, the buck fell to new four-year lows against the euro (really the "synthetic euro", because the currency hadn't even been introduced yet four years ago). Meanwhile, the Dollar Index, which shows how the dollar is faring against a basket of major currencies, has fallen 9.2 percent this year.

So why is this a problem for the market? Put yourself in the shoes of a European portfolio manager (ooh, nice tassels), hanging out in some cafe drinking an espresso and looking over your portfolio. Let's say you're an investing genius, and you bought U.S. stocks on Oct. 9, when they closed at their lowest level in over five years. Since then, the S&P 500 has risen 18 percent.

But in the same period, the dollar has slipped a bit over 13 percent against the euro. Add it all up and in local currency terms you've made just about 2.5 percent on your U.S. stock investment. Ugh.

Of course most global portfolio managers aren't geniuses. They are, by definition, just average. The U.S. market has not been nearly as kind to them lately as you'd think if you just glanced at the major indexes and, given a widely held belief that the dollar has further to fall, many may be considering pulling money out of the U.S. assets. Or maybe they are pulling money out of the United States, and that's why the dollar is drooping.

All of which leads us to the nightmare scenario. It comes up every few years, and it goes like this: All those global portfolio managers, worried about the hits they're taking from the dollar, are going to start selling U.S. assets which is going to: A) send U.S. stocks lower and B) further damage the dollar. Which is only going to make the global investors (and U.S. ones) more twitchy, and beget more selling. Which will beget more selling. Pretty soon you have a massive rush to exit U.S. assets, and a global financial catastrophe.

Pretty scary, right? If it's any consolation, there have always been people who worry investors are going to rush out of the United States. They point out that the United States' has a huge current account deficit, meaning that, on net, foreigners own far more U.S. assets than U.S. investors own foreign assets. Eventually, the argument goes, the foreigners are going to want to repatriate their money -- and if the dollar is falling badly, they may want to repatriate it in a hurry.

Like other disaster scenarios that people get worked up about -- Y2K, Skylab -- the big, bad dollar drop has never happened. The problem, however, is that when these dollar worries surface, stocks often see a period of weakness.