Thursday, July 10, 2014

Euro rally could put brake on recovery

October 18. 2013 8:36AM
Associated Press

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(AP) The euro pushed above $1.37 on Friday for the first time since February in a move that analysts say could crimp the single currency zone's recovery from recession.

Europe's currency has garnered support this year thanks to an easing in the continent's debt crisis and a return to economic growth.

However, in recent days, its appreciation against the dollar has accelerated as the U.S. government struggled to raise the country's debt ceiling. Even though a deal was agreed at the last minute, the U.S.'s economic reputation and the status of the dollar as the world's reserve currency have taken a hit. As a result, the dollar suffered a broad-based drop.

By early afternoon Friday trading in London, the euro was trading 0.1 percent higher at $1.3684, having earlier risen to $1.3704, its highest level since Feb. 1.

Analysts say the strength of the euro which as recently as mid-July was trading below $1.30 could make the eurozone's exports more expensive in international markets, threatening the overall recovery.

"Regardless of its causes and justifications, the euro's strength threatens to have a negative impact on the growth of eurozone exports," said Jonathan Loynes, chief European economist at Capital Economics.

The 17-country eurozone emerged from its longest-ever recession in the second quarter. The quarterly growth rate of 0.3 percent was largely due to Germany, Europe's economic powerhouse that relies heavily on its high-value exporters.

Figures next month are expected to show the eurozone grew again in the third quarter and that the recovery was more evenly spread across sectors and countries.

It takes several months for the effects of a rising currency to be felt in the economy, so the euro's current rise may not become clear until the end of the year. However, surveys show business managers in the eurozone are already becoming concerned.

Unlike, say, the Bank of Japan, the European Central Bank isn't in the habit of directly intervening in foreign exchange markets to influence the value of the euro. Not since 2000, when the fledgling euro was trying to establish itself, has the ECB directly intervened in markets to influence the currency.

However, previous bouts of euro strength have prompted policymakers to voice concern. Earlier this year, when the euro was also rising, ECB President Mario Draghi went out of his way to point out that his central bank monitors the impact of the euro's strength on inflation. Investors interpreted that as an indication the ECB would consider an interest rate cut, which has the potential to reduce the value of the euro.

If the euro's current strength continues, markets will be monitoring Draghi's next monthly press conference on Nov. 7 for any similar hints of action.

Associated Press

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