Speculation grows on dollar/euro parity

THE euro has fallen below US$1.05, the lowest level since its launch in January, prompting growing speculation by analysts over the possibility that it might go for 1-to-1 parity against the US dollar.

After hitting an all-time low in New York overnight at $1.0407 yesterday, the euro recovered some lost ground to $1.0446. This level, however, is still a far cry from more than $1.15 at the beginning of the year when the euro was launched.

''People are waiting to see whether the euro will fall further. They are looking at the parity of 1 to 1,'' said Tharis Panpiemras, a foreign exchange expert at the Banking Department of the Bank of Thailand (BOT). ''Of course, the European Central Bank might not want the euro to fall to that point because it will give the impression that the euro is not a stable currency.''

He said there was hope that the euro might rebound if the present weakness helped to boost exports from Europe, which as a result will experience stronger growth.

The catalyst of the recent fall of the euro is the European Union (EU) decision to allow Italy to increase its 1999 budget deficit from 2 to 2.4 per cent. Although this budget deficit is still well below the 3 per cent level as agreed in the EU's Growth and Stability Pact -- the cornerstone of the European Monetary Union -- it shows cracks in the political will for broader integration.

Burkhard Voss Henrich, general manager of Dresdner Bank in Bangkok, said agreement by the EU on Wednesday to allow Italy to widen its budget deficit had added to negative events surrounding the euro, which has also been suffering from a lack of political support.

He cited an unexpectedly strong US economic performance and weaker than expected European growth as underlying the euro's weakness. ''At the end of last year, everybody was expecting that Europe would pick up while at the same time, the US economy would slow down. But now we have a contrary situation,'' Henrich said.

In addition, the Kosovo crisis, which has been taking place on the borders of Western Europe, has also contributed to the situation, he said.

However, Henrich said the euro's weakness was not all bad since it is going to benefit exports from Europe, which is now suffering from stagnation, and help improve growth prospects. ''Experience in Germany over the past 10 years has shown that whenever we have a pick-up in exports, our domestic demand improves and helps the economy to grow,'' he added.

He said he was not surprised by the sharp weakness of the euro, compared to the volatile movement the Deutschmark had gone through in relation to the US dollar in the past. ''The question is where is [the fall of the euro] going to stop?,'' Henrich said. ''But as far as the European Central Bank is concerned, they have made it clear that they do not believe in sustainable intervention to support the euro.''

The BOT's Tharis said his understanding was that Thai exporters and importers still preferred to deal with the Deutschmark or the French franc rather than the euro, which will take more time for people to become more comfortable with the new currency.

Between now and the end of the year, he cautioned that it remained unclear how the euro will move because the Kosovo factor is still lingering on and nobody knows when the war will come to an end. ''If it ends quickly, it will be good for Europe, which will see improvements in exports and production,'' he said.

It also depends on US economic performance, which is still marred by its huge trade deficit. The deficit means that there will be more dollar supply coming out to finance it, which will affect the American currency.

BY THANONG KHANTHONG