German Economic Report Sends Euro to New Low, Revives Pressure for Intervention

The beleaguered euro lurched to fresh record lows against the dollar Wednesday, after a disappointing German business confidence report gave investors yet another reason to sell the currency.

The latest decline puts new pressure on the euro zone and other governments to consider intervening in foreign exchange markets to bolster the currency.

The influential Ifo institute’s German business-climate index fell for the third straight month, raising the prospect that the euro zone’s largest economy may be slowing.

Also, Italy said its gross domestic product grew 0.3% in the second quarter, less than half the pace of expansion expected.

The euro plummeted to a new low of 84.6 U.S. cents on the news, down from 85.2 cents Tuesday.

“We’ll probably keep seeing overnight back-to-back record lows everyday,” said Bernard Tsui, vice president and foreign exchange advisor at Union Bank of California.

In the last week, various international finance officials have remarked on the urgency of the euro’s plummet, with some calling for central bank action to prop it up.

Alfred Broaddus, president of the Federal Reserve Bank of Richmond, said Friday that the euro’s fall raises questions about its long-term viability. Economist Paul Krugman, writing in the New York Times on Wedneday, said the U.S. should go along with Europe in joint intervention.

But with the United States still officially favoring a strong dollar, skepticism remains high about the chances of concerted central bank action to support the euro ahead of the weekend Group of 7 meeting, where the currency’s plight is expected to be a main topic of discussion.

“The bottom line is without U.S. agreement on intervention the statement that is going to come out of the G-7 is just going to be words without any backing,” said Jeremy Fand, chief foreign exchange strategist at UBS Warburg.

However, one reason such a move might be in the interest of the U.S. is that the euro’s decline is hurting U.S. multinationals. A growing list of companies, including McDonald’s Corp., Gillette Co. and Estee Lauder Cos., have warned in recent weeks that the slumping euro currency is devaluing their European sales and earnings.

More ominous, analysts said the euro’s 28% decline against the dollar since its launch in January 1999 was forcing global investors to consider liquidating euro assets.

Major European stock markets have been in a steep decline in recent weeks. Wednesday, the German market fell 2.5%, the French market lost 1.9% and the Italian market slid 2.1%.

If reports to be released in coming days provide more evidence of economic decline in Europe, it could persuade more investors to pull funds from Europe in favor of the stronger U.S. economy.

Horst Koehler, International Monetary Fund’s managing director, said Wednesday that currency purchases by central banks should be considered to bolster the euro.

“There’s no doubt that the euro is undervalued, heavily undervalued,” given the strength of European economies, Koehler said. “It’s also clear that intervention cannot be taboo.”

But Portugal’s central bank governor, Vitor Constancio, joined Germany in criticizing the IMF’s position. What’s more, Italian Prime Minister Giuliano Amato was quoted by the Handelsblatt newspaper as saying the weak euro was helping companies in the region by making their exports cheaper--reinforcing the market’s doubts about Europe’s resolve to halt the currency’s slide.

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How Much Lower?

The euro currency fell again Wednesday to a record low against the U.S. dollar.

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Euro’s value in U.S. dollars, monthly closes and latest

Wednesday: 84.6 cents

Source: Bloomberg News