Multinational Rescue Boosts Euro, but Some Wonder If It’s Enough
Surprising world markets with carefully choreographed stealth, the U.S. Federal Reserve and European and Japanese central bankers pounced Friday to halt the slide of the euro, whose shocking 27% loss in lifetime value has threatened the balance of global commerce.
The bankers’ purchase of euros, their first concerted bid ever at shoring up the common European currency, was almost instantly effective.
The euro soared from Thursday’s New York close of 85.8 U.S. cents to as high as 90.1 cents Friday after the intervention was announced, but then it fell back, ending in New York at about 87.9 cents.
The concerted action, which caught many traders unawares, seemed to restore, if only temporarily, a semblance of sanity to currency markets, where the overwhelming consensus is that the euro is woefully undervalued. It also was a vivid object lesson that, when leaders of the Group of 7--the United States and half a dozen of the world’s other rich democracies--choose to, they can move those markets.
The quick reversal of the euro’s fortunes proves that “the G-7 still has power,” Nick Parsons, economist at Commerzbank in London, told Agence France-Presse.
The collapse of the euro, quoted at $1.17 when it debuted Jan. 1, 1999, had fueled an alarming revival of European inflation and made petroleum, whose price in dollars has been skyrocketing, even more expensive for consumers from Finland to Spain.
For U.S. businesses, a pricier dollar relative to the euro has made peddling exports in Europe and other competitive markets increasingly difficult, further ballooning the record U.S. trade deficit.
And European subsidiaries of U.S. companies, including Intel Corp., Gillette Co. and McDonald’s Corp., were seeing their profits erode because the money coming into the cash registers on this side of the Atlantic was worth less and less in dollar terms.
“A lot of U.S. companies have been issuing profit warnings recently, pointing to the strong dollar and weak euro as hampering their profits,” Gerhard Grebe, analyst at Julius Baer investment bank in Frankfurt, Germany, said in a telephone interview. “It had become in all countries’ interest to support the euro.”
Earlier this week, U.S. Treasury Secretary Lawrence Summers appeared to signal reluctance to take part in a multinational rescue operation for the European currency, reiterating the Clinton administration’s commitment to a strong dollar.
But in the Czech capital, Prague, where the G-7 finance ministers are to meet today, chief economist Michael Mussa of the International Monetary Fund said the euro had become so alarmingly anemic that it was in need of immediate international assistance.
“You have to ask, ‘If not now, when?’ ” Mussa said.
Some analysts had believed it improbable that the U.S. government would agree to intervene in currency markets in an election year. But the fallout from the constantly shrinking euro has so perturbed some U.S. corporations that they have been pressing the White House to act.
“Are we hearing complaints? Yes, we are,” Martin N. Baily, chairman of the White House Council of Economic Advisors, said in an interview with Bloomberg Television.
At the request of the Treasury, the Fed bought euros for dollars. The European Central Bank, the Fed’s euro zone equivalent, bought euros for dollars and Japanese yen.
ECB officials declined to say how much money was involved, although analysts said the bank and 11 euro zone member countries have deep pockets--reserves worth 500 billion euros. An ECB statement said the central bankers acted together out of “shared concern about the potential implications of recent movements in the euro exchange rates for the world economy.”
Japan’s central bank and the Bank of England, which is outside the euro system, also participated in the multinational monetary rescue, the first since the Fed, Germany’s Bundesbank and the Bank of Japan bought dollars to boost the greenback in August 1995.
The last time the United States intervened in the markets to aid a foreign currency was in June 1998 on behalf of the yen.
The euro, which for now exists chiefly as an accounting unit, was hammered in part because the booming U.S. economy was seen as more attractive for investment, even though Europe’s economy has generally been healthy.
As the euro continued to plunge despite five interest rate hikes this year by the ECB, there was a growing crisis of confidence in the central bank and its Dutch president, Wim Duisenberg.
“Market psychology had turned against the euro, and an electric shock in its favor was needed,” said Marc Touati, analyst at Natexis Banques Populaires, a Paris investment firm. “But an electric shock from the ECB alone would have been doomed in advance. What was needed was a concerted approach, especially with the U.S. Federal Reserve.
“What has happened is, on the whole, good news, but is it enough to have a strong euro again? Unfortunately, no,” Touati predicted.
Many analysts admitted being surprised at the timing of the intervention, although it had appeared increasingly probable in recent days that the ECB and its foreign counterparts would have to do something. Grebe, the German economist, conjectured that the moment chosen might have something to do with an upcoming referendum in Denmark.
On Thursday, the Danes are to vote on whether to become the 13th member of the euro zone. (Greece is already set to join Jan. 1.) A stronger euro might coax more Danes to vote “yes.”
“If, as opinion polls suggest, there is a 10% margin of victory in Denmark for the ‘no’s,’ then the euro will be under pressure in the markets again,” Grebe said. “More intervention then will be needed. This market can’t be turned around with a single blow.”
Even with Friday’s uptick, “the euro is totally undervalued today against other major currencies like the dollar, yen and [British] pound,” Grebe said. A fairer trading value, in line with the current and future potential and productivity of the euro zone, would be between $1.00 and $1.10, he said.
Starting in January 2002, the euro will cease to be a virtual currency used chiefly for noncash transactions, and euro bank notes and coins will replace German marks, French francs, Italian lire and the other national currencies of member countries.
