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By Jennifer Yousfi
The euro fell to a one-year low versus the dollar as economic concerns about European Union member nations continue to mount.
The euro shed 0.6% to trade at $1.394 at 1:40 p.m. in New York yesterday (Thursday). Wednesday, the dollar reached as high as $1.3882, its highest level since Sept. 18, 2007, before dropping slightly to close at $1.3998, according to Bloomberg data.
“As Europe and even emerging economies struggle from the fallout of the subprime crisis, there is sentiment that the [United States] is doing relatively well compared with the rest of the world,” Saburo Matsumoto, chief foreign exchange strategist at Sumitomo Trust Bank, told AFP.
The euro’s slide versus the dollar and other major traded currencies, including the yen, came after a report from the European Commission that Germany, Spain and the United Kingdom could find themselves in a recession this year.
Joaquín Almunia, the economics and monetary affairs commissioner for the Commission, described the current European economic environment as "difficult and uncertain," The Financial Times reported.
The Commission downgraded its economic outlook projections for both the 27-country European Union and the 15-nation Eurozone whose members share the common euro currency. The EU forecast was lowered to 1.4% from 2.0%, while the Eurozone forecast was lowered to 1.3% from the 1.7% that had been predicted in April.
Germany, the EU’s largest economy, is expected to see a 0.2% contraction in gross domestic product (GDP) for the third quarter after a 0.5% contraction in the second quarter. Two consecutive quarters of economic contraction are the textbook definition of a recession.
The economies of the United Kingdom and Spain are expected to shrink in both the third and fourth quarters, while economic growth in France and Italy are expected to be flat.
Europe has been affected by the global credit crisis, as well as a slump in global consumer demand. Several countries, including the United Kingdom and Spain are grappling with housing recessions. But a weaker euro could prove to be a boost to European economies; much like the weak dollar stimulated U.S. exports.
The growing uncertainty about some of the Eurozone’s largest economies could cause the European Central Bank to reverse course and cut interest rates. Led by hawkish President Jean-Claude Trichet, the ECB voted to raise the key interest rate 25 basis points to its current level of 4.25% in July in an effort to fight rampant price inflation. Since that meeting the ECB’s monetary policy committee has voted to hold rates steady.
After the European Commission report, Trichet told the European parliament that the “current episode of weak economic growth is expected to be followed by a gradual recovery,” The Financial Times reported.
Trichet’s comments indicate he intends to stand firm on rates for now. ECB Vice President Lucas Papademos echoed Trichet’s comments at a press conference in Germany yesterday.
“There are indications that broad-based second-round effects are materializing and we want to make sure that they don't become even broader and stronger,” Papademos told reporters in Hamburg, Bloomberg reported. “It's not considered likely” that Eurozone GDP will shrink in the third quarter “but it can't be excluded, taking into account uncertainty and downside risks,” he added.
Despite the ECB’s firm commitment to continue battling inflation, a Bloomberg survey of economists predicts that the ECB’s key rate will need to be reduced back to 4.0% within the first three months of 2009.
News and Related Story Links:
Dollar Rises to One-Year High Against Euro on Global Outlook
ECB's Papademos Says Europe Likely to Avoid Recession
The Financial Times:
Recession forecast for Germany, Spain and UK
ECB Holds Rates Steady, but Growth Concerns are Beginning to Supplant Fears About Inflation