The Euro`s Dive Enhances Dollar

Holland’s potential rejection of the European Union constitution Wednesday, June 1, in the wake of France now looks like another nail in the euro’s coffin.
Tuesday’s initial seven-month low against the dollar of one euro: $1.2350, steadied slightly the next day at around $1.2320 Wednesday. But for several weeks, the currency markets have been dominated by the strengthening of the US dollar at the euro’s expense. During the months before the French and Dutch votes, the 12-nation currency had already slid against the dollar by just over 7%, after gaining on the US currency for three straight years. The downward trend was further confirmed by the euro’s dive earlier this week against other important world currencies, sterling and the Japanese yen.
The euro’s nosedive has three main causes:
1. France’s rejection of the European Union’s charter is a stinging setback to euro zone champions – especially if as expected the Netherlands follows suit – and a stumbling block to the zone’s planned enlargement to embrace more East European countries and Turkey. The constitution is designed to speed up the Union’s integration and knock over trading walls among members that fragment the European Union as a bloc. It creates a European president and foreign minister for the first time and further empowers the European parliament, must be signed by all 25 member nations by November 2006 to take effect.
Nine have approved, with 7 to go after Holland. Even though the French non was widely predicted, the markets reacted with a euro sellout for dollars, sterling and Swiss francs.
2. Low interest – 2% p.a. basic held down for two years in the euro zone in comparison with the climbing US Federal Reserve rate which stands now at 3.25% and the United Kingdom’s 4.7%. Miniscule growth in the euro zone keeps interest low. Some economists predict a further tumble after the summer vacation.
The European currency’s attractions are fading and, according to the latest reports, some strategic investors intend using it as a funding currency, i.e. they will sell off euros to buy more appealing financial assets and currencies.
3. The European Union at large is generating a slew of negative economic indicators, particularly for its leading members. Germany, France and Italy are in the throes of a slowdown and rising unemployment, declining business credibility and unstable consumer price indeces.
While a weak euro against the dollar may be advantageous for European exporters who have suffered from their surging currency in the short term, rejection of the charter means the European economy is resisting change and essential reforms that would ease competition across European borders and fuel future growth within the EU.
The new French prime minister Dominique de Villepin is not seen as a herald of change. The next EU summit taking place in Brussels on June 16 will be a crisis meeting to deal with a volatile economic reality threatening to weigh heavily on the union’s once-bright prospect and possibly also the life span of the world`s youngest currency.

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