- The Washington Times - Tuesday, July 16, 2002

FRANKFURT, Germany — The dollar slipped below the benchmark of one-to-one with the euro yesterday for the first time in 2 years, reflecting worries about the U.S. economy and stocks.

The breakthrough lent a psychological boost to the euro's supporters, but economists said it was less a sign of new strength in Europe's economies than a milestone in the decline of the dollar.

Huge U.S. trade deficits and the accounting scandals rocking Wall Street have had experts predicting the dollar's fall and the euro's eventual rise above $1 for weeks.

"It was about time," said Dorothea Huttanus, an economist at DZ Bank in Frankfurt.

The euro, which has gained about 15 percent in value since starting its rally in early April, hit parity at around midday and later touched $1.0087 before easing. In midday trading in New York, the euro was quoted at $1.0071.

A stronger euro means more expensive European vacations for U.S. tourists and higher prices for imported goods ranging from French wine to German sports cars. But it offers relief to U.S. manufacturers by making their goods cheaper compared with those of foreign competitors.

Thomas Duesterberg, president and chief executive of Manufacturers Alliance/MAPI, said the breaching of dollar-euro parity was a psychological boost.

"From the perspective of the manufacturing community, it is generally viewed as a positive sign," he said. "The value of the dollar had gotten so high that many domestic-based producers were unable to compete effectively."

From Europe's point of view, a relatively stronger euro helps keep inflation under control and makes the event that the European Central Bank will raise interest rates to control prices a move that can hurt economic growth less likely.

The euro has rallied despite an absence of encouraging economic news from the 12 countries using the currency. First-quarter growth in the euro zone was an anemic 0.3 percent, though most economists predict a pickup in the second half of this year.

Instead, the euro's rise has been driven by bad news from Wall Street, where stocks have fallen for eight consecutive weeks. The Dow Jones Industrial Average fell 440 points before recovering and finishing the day down just 45 points, or 0.52 percent, at 8,639.

"It's still a dollar-negative story, not a euro-positive story," added Commerzbank economist Michael Schubert.

The euro's strength could help its supporters blunt criticism that businesses restaurants and bars, for instance jacked up prices when euro cash was introduced in January. It could also improve the euro's image in Britain, Sweden and Denmark, which have stayed out so far.

But the stronger euro also cuts into the price advantage held by European exporters often the industries that European countries, especially Germany, expect to lead their economies out of the doldrums.

The euro's rise above parity with the dollar will help U.S. exports and weaken pressure on the administration of President Bush for more protectionism, European Commission President Romano Prodi said.

"It's clear that a weaker dollar favors U.S. exports, and so it should weaken protectionist tendencies," he told reporters.

Foreign investors kept the dollar high for years because they needed dollars to buy a piece of the U.S. stock market boom. That offset soaring trade deficits Americans buy more from overseas than they can sell abroad that tend to undermine a nation's currency.

Some of the money fleeing stocks has sought safety in the euro zone, where higher interest rates make for a more attractive place to invest.

The euro hit its all-time high of $1.18 shortly after its debut Jan. 1, 1999, but then it began a long slide, falling through the $1 mark in February 2000 and hitting a record low of 82.30 cents in October 2000.

Some economists are cautious on whether the euro's rally can last.

The euro will sink again if the United States straightens out its problems with corporate accounting and if investors regain their appetite for the risks of owning stocks, said Julian von Landesberger, an economist at HVB bank in Munich.

"At some point, a discussion is going to kick off about whether it hasn't overreached," he said. Mr. Landesberger forecast that the euro will reach $1.05 by the end of the year, but retreat to 98 cents a year from now.

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