Business Matters Making heads and tails of the euro

By Kevin FitzGerald

Every year my wife and I visit family in Ireland. The euro has been falling recently, and I’m not sure at what point I should convert my dollars before my annual trip in August. Can you help me understand what’s going on with the Euro?

— J.O., Rockville Centre

As a refresher, it may be helpful to review the basics of the euro. The euro is the currency of European economic and monetary union and includes 11 member countries: Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Portugal, and Spain. While the price of the euro itself fluctuates with other world currencies, the exchange rate between the (European Economic Union) EMU member nations and the euro is fixed. For example, one euro equals 0.787564 Irish punts. Therefore, as the euro weakens, the underlying currencies for the 11 member countries also weaken in proportion to their fixed ratio to the euro. Individual EMU nations still continue to use their own currencies (bills and coins) until Jan. 1, 2002 when the euro currency will be introduced.

From its debut on Jan. 4, 1999, the euro has had quite a bumpy ride — reaching a high of $1.18 (as reported in Barron’s), and closing on Friday, June 4, at $1.04 (as listed in the Wall Street Journal). Why the slump in the euro? There have been many articles during the last few months addressing the reasons for this. As reported in the May 31 issue of Barron’s, there seem to be two key reasons for this. First is the relative strength of the U.S. economy as compared with that of Europe. Second, the conflict in Kosovo has also been listed as a contributing factor.

However, as reported in the International Section of the Wall Street Journal (June 3), the European Commission itself may be partially the reason. As previously widely reported, in March of this year the entire European Commission resigned. The Journal went on to explain that the most recent disagreement was started by the European Commission’s decision to allow Italy to ease their budget deficit target for 1999. Despite even this most recent split within the EMU, the same Wall Street Journal report highlights this simple reality: while the U.S. economy moved along at a 4.1 percent pace during the first quarter, Italy and Germany were growing at approximately a .2 percent rate. This is quite important since Italy and Germany represent almost 50 percent of the euro-zone’s gross domestic product. This growth differential, has been cited as a key factor in the weakness of the euro.

Where does this leave you regarding your planned trip? While it’s impossible to predict the direction of volatile foreign exchange markets, Dan Ascani, president and director of research, Global Market Strategies, Inc. indicated earlier this month that the euro had support in the $1.02 to $1.05 area but that since the euro/dollar level is so close to par, the market might try to test that level.