20 December 2001, 12:43 OUTLOOK Euro seen under pressure in 2002 as US leads world growth
--- by Sivakumar Sithraputhran ---
LONDON (AFX) - The euro is likely to remain under pressure in the
coming year as a US-led global recovery looks set to leave the euro
zone lagging despite a possible psychological boost when euro notes and
coins start circulating on Jan 1, economists said.
Most noted that any motivating factor for the common currency's
rise lies outside the borders of the euro zone and will only come at
the expense of the dollar.
But with consensus forecasts indicating a second-half recovery in
the US, the chances of a higher euro appear slim, they said.
But others pointed to historical evidence that the dollar is likely
to weaken as US rates reach bottom.
Michael Klawitter, currency strategist at West LB Research, said
the net effect of the launch of euro notes and coins is likely to be
neutral.
"Worse, any hiccups will send the euro lower," he said.
Klawitter said that overall, the euro is likely to test fresh lows
in the coming year. A reversal in the pattern of flows either in terms
of foreign direct or portfolio investments is unlikely, he said, adding
that the US will lead global recovery.
Klawitter said that in 2002, the euro faces new pressures as the
euro zone prepares for enlargement, with old issues still unresolved.
The structural reforms have yet to materialise, he said.
"Short term rallies may come but I am fairly pessimistic," he added.
An ING Barings report concludes that the rebirth of the euro in
physical form, with the introduction of euro notes and coins is
unlikely to lead to its long predicted revival.
"Once again, forecasts of the euro recovering lost ground rest less
on hopes for good news from the euro zone than on a loss of confidence
in the dollar. However, any signs of a substantial rebound in the US
economy are likely to put paid to the latter," it said.
Barring dramatic new setbacks for the US economy, Europe's new
currency may struggle to make headway against the dollar, the report
said.
According to economists at Credit Suisse First Boston, the
introduction of euro notes and coins is largely a symbolic event but it
may have some residual effect on market psychology by bringing to an
end the worries about conversion of undeclared cash out of the euro
legacy currencies.
HSBC analysts agreed, saying that while upside potential from the
changeover may be limited, the chances of a slide are also small.
"Concerns that the changeover may spell a weaker euro are
overstated, the quantity of money likely to be swapped into dollars is
tiny in relation to the key drivers of the exchange rate," they said.
CSFB economists were more upbeat on the euro, predicting a rise in
the second half of 2002.
"Indeed we believe that the euro-dollar will rise in the second
half of 2002, once the Fed has completed its easing cycle," they said.
Historically, the dollar has a tendency to depreciate when the
Federal Reserve is nearing the end of a major easing cycle, and
particularly during the early stages of the subsequent tightening
cycle, they added.
But even this optimistic projection includes a notable risk
scenario.
The difference in fiscal expansion between the US and the euro zone
could help the dollar firm, CSFB said.
In the US, the budget deficit for next year is going to be just
under 2 pct of GDP while several euro zone nations are straining to
stay within the 3 pct limit set by the stability pact, they said.
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