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.

© 1999-2022 Forex EuroClub
All rights reserved