Henry and Thread:
What's Interesting Here is the apparent beginnings of the first test
of the ECU internal structures at balancing one counties needs against
the entire ECU. Also, without stronge capital flows into the ECU Bonds
any recessionary pressures will cause interest rates to rise, bringing
a new set of problems.
Europe's New Currency Losing Luster
By PAUL GEITNER
.c The Associated Press
BERLIN (AP) -- Just a few months ago, Europe's new single currency was the darling of foreign exchange markets. But with European economies weakening while the United States continues to boom, the euro has lost some of its glow.
Investors and central banks had been expected to snap up the new currency after its Jan. 1 debut, pushing it up in value. Some suggested it might soon rival the dollar as a reserve currency.
Instead, it has declined steadily. Analysts point to the surprising strength of the U.S. economy and the prospect of higher interest rates in the United States, which mean higher returns for investors.
European Central Bank officials have said the fledgling currency's drop of nearly 7 percent against the dollar since its launch is nothing to worry about -- yet. It was trading Wednesday at about 1.09 to the dollar, after starting at almost 1.17.
In fact, some European politicians, notably Germany's leftist Finance Minister Oskar Lafontaine, have welcomed the drop, which makes goods made in Germany or other euro countries more competitive on the world market.
Lafontaine has been the most vocal in pressing the new central bank, which sets monetary policy for the 11 euro nations, for a further drop in interest rates. He argues that it would stimulate growth in Europe and create jobs.
His appeal is taking on added urgency as Germany teeters on the brink of a recession.
Growth has slowed in many European economies, due largely to ripple effects from the slump in Japan and other parts of Asia. But Germany's economy, heavily dependent on exports, actually shrunk 0.4 percent in last quarter of 1998, compared to 6.1 percent growth in the United States over the same period.
German industrial production in those three months fell 7.8 percent, a worse showing even than recession-hit Japan.
Still, analysts said concerns about adding to the euro's slide against the dollar -- as well as a determination not to be seen as giving in to political pressure -- were arguments against the Frankfurt-based bank cutting interest rates at its regular board meeting Thursday.
Rates were set at a uniform 3 percent across the euro bloc just before the currency was launched.
''Admittedly, interest rates could come down,'' given the lack of an inflation threat and economic weakness in Europe, especially Germany, said Peter Dixon, senior economist at Commerzbank in Frankfurt.
''But if the European economy really is as sick as it appears, a quarter point drop in interest rates isn't going to help anyway,'' he said.
Bank president Wim Duisenberg said he expected the euro to recover soon because it has a strong base.
''The euro is the currency for 300 million people,'' he said.
AP-NY-03-03-99 1548EST
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