Europe Concerned as Dollar Decline Continues

A number of European countries have embarked on a slow recovery following the economic collapse late last year. But with the euro now at a 14-month high against the dollar, euro zone officials worry exports could suffer.

The signs of a recovering global economy are everywhere. Global stocks are up 75 percent from the deep lows seen in the darkest days of the financial crisis, many banks and other financial institutions are reporting a return to profits and a number of countries have emerged from recession.

But one development has some in Europe concerned that the path to recovery in Europe's single currency zone could be riddled with obstacles: The dollar continues to weaken against the euro. The result is that European exports -- one of the primary engines behind Europe's fragile recovery -- are becoming more expensive in the United States and in a number of Asian countries that have pegged their currency to the dollar.



On Tuesday, a euro was going for $1.4976, just off its 14-month high of $1.4994 seen on Monday. Many, though, expect the dollar to continue its fall against the euro with a return to the $1.60 rate seen in the summer of 2008 a possibility.

'Excessive Volatility'

Finance ministers from countries belonging to the 16-member euro zone addressed the issue at a Monday meeting in Luxembourg. "It is a problem that we are working on," Jean-Claude Juncker, Luxembourg's finance minister and chairman of the euro group, told reporters. "We spent quite a long time discussing exchange rates."

Jean-Claude Trichet, head of the European Central Bank, said that Europe has "a vested interest in a solid and stable currency system" adding that "excessive volatility and disorderly movements on exchange markets are bad for economic and financial stability."

The development is of particular concern in Germany, whose economy is heavily reliant on exports. The euro's strength against the pound likewise pushes up the price of German goods in the euro zone's largest trading partner, Britain. The German government expects the country's economy to grow by a modest 1.2 percent in 2010 after an expected drop of 5 percent in 2009. The country's economy left recession behind with 0.3 percent growth in the second quarter and a further 0.75 percent up-tick in the third.

'Unbearable'

The euro zone economy as a whole, however, remains moribund, with the International Monetary Fund projecting just 0.3 percent growth for the region in 2010. Henri Guaino, a special counsellor to French President Nicolas Sarkozy, said the US was "flooding the world" with dollars. He added that dollar weakness may become "unbearable," according to the financial newswire Bloomberg.

US officials have insisted that they are interested in strengthening the dollar. US Treasury Secretary Timothy Geithner said earlier this month that a strong US currency was "very important."

"We all note with considerable attention the statements made by American authorities as regards their support in favor of a strong dollar," Trichet said on Monday.

Lexembourg's Juncker told reporters the same day that he, Trichet and European Commissioner for Economic and Monetary Affairs Joaquin Almunia would travel to China later this year to discuss exchange rate policy. Beijing's currency, the yuan, has been virtually pegged to the dollar since the global economy plunged into crisis in 2008.