- The Washington Times - Thursday, June 2, 2005

The U.S. dollar is getting a boost from the slide in the euro caused by voters’ resounding rejection of a European constitution in France and the Netherlands.

The respite from the dollar’s three-year tailspin offers a bit of hope for travelers who are looking to hold down the shocking cost of a European vacation since the dollar lost nearly half its value against the euro at the end of last year.

“Americans will eat out more in Paris, buy more Burberry coats in London and more diamonds in Amsterdam,” said Bob Whitley, president of the U.S. Tour Operators Association.

The euro dipped below $1.22 in New York trading yesterday, an eight-month low. The currency has lost more than 10 percent of its value against the dollar since the beginning of the year.

Perhaps even more significant than the regained purchasing power, analysts say, is the renewed luster of the dollar as the world’s reigning currency.

The euro’s ascent since 2002 had inspired speculation that it eventually might supplant the dollar as the choice of businesses, central banks and investors worldwide.

Having the predominant currency in the world offers many benefits for a nation and its consumers, creating a positive cycle of investment and growth, as well as lower inflation and interest rates and higher living standards.

Europe’s leaders made little secret of their hope that the fledgling European currency, introduced in 1999, might someday enjoy the advantages of the dollar.

But this week’s referendums appeared to clinch the conclusion of many financial observers that the European Union is not ready to assume such a title role.

“Europe is increasingly viewed as a dithering, dysfunctional family,” said Joseph P. Quinlan, chief investment strategist with Bank of America.

The rejection of the constitution drafted by Europe’s top political leaders is only the latest episode to show that Europeans are “unable and unwilling to make tough economic decisions about future economic growth,” he said.

A ratified constitution would have given the European Union a key asset that has made the dollar strong and preferred worldwide: the support of a single, unified government heading up the world’s largest economy.

The European economy is about the same size as the U.S. economy, and, like the United States, Europe plays an essential role in world trade.

But Europeans have repeatedly rebuffed the reforms needed in the Continent’s rigid labor markets and bloated bureaucracies if Europe is to rise to the U.S. level of economic efficiency and strength that has sustained the dollar, Mr. Quinlan said.

That’s why the euro’s chances of upending the dollar are “slim,” he said, despite huge U.S. trade deficits that weaken the dollar and the euro’s meteoric rise as the chief alternative to the greenback in recent years.

By the end of last year, the rise of the European currency had diminished the dollar’s share of bank assets to 42 percent from a peak of 75 percent in 1984. Also by last year, about as many bonds and notes were issued in euros worldwide as in dollars.

The euro’s gleam was enhanced further last fall when the Russian central bank announced that it would diversify its more than $100 billion in foreign-exchange reserves away from the dollar, citing the dollar’s weakening trend.

But the bulk of the world’s $2 trillion in exchange reserves — 69 percent — remains in U.S. dollars, although that total has declined from 75 percent since the euro was minted. The U.S. currency also continues to play a pre-eminent role in world trade, with key commodities from oil to gold denominated in dollars.

The willingness of the overwhelming majority of foreigners to keep putting their trust in dollars will be critical if the United States is to maintain its financial and economic health, said John Chambers, analyst with Standard & Poor’s Corp.

That is because the United States has become dependent on the massive inflow of funds from abroad as banks and investors place their dollar holdings in U.S. securities and other assets. Without those flows, the United States could not finance its record budget and trade deficits.

Since the U.S. government in particular is heavily dependent on Asian central banks to finance its $400 billion budget deficits, it will have to bolster international confidence in the dollar by significantly reducing those deficits, he said.

“Any policy which exacerbates the imbalances would put the dollar’s role as the key international currency more at risk,” he said.

• Donna DeMarco contributed to this report.

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