The euro still remains low, but its weakness has stimulated growth in the European community. Dale T...
The euro still remains low, but its weakness has stimulated growth in the European community.
Dale Thomas, director of fixed income and currency group at Rothschilds Asset Management, says: "The euro has fallen, despite the convergence of interest rates between US and UK. We would have expected the euro to appreciate rapidly against the dollar but it is still suffering."
The main factor for this has been the enormous flow of money capital from Europe to the US into portfolio and foreign direct investment companies. There has been a stream of corporate mergers and acquisitions and a explosion of money moving overseas that has been funding the US current account deficit, which has been running over 4% of GDP.
The US is ahead of Europe in a number of industries such as technology and Europe has invested in the US to be able to keep up with competitions.
A secondary factor which may have weakened the euro is high oil prices, which have typically been good for the dollar, although they are set to fall in the next 12 months.
Tim O'Dell, director of fixed income at Investec and responsible for currency strategy, says: "The number of voices in the European Central Bank talking about the euro has also caused confusion about its value. The German finance minister has called for it to remain weak as it stimulates their exports, while stronger countries want the euro to strengthen.
"Historically, it is not sustainable for the euro to remain low," says Thomas. "We do not anticipate this to continue indefinitely and we expect the euro to rise. In the short term, however, the euro may weaken further. It is possible it may go down to the mid 80s, but we expect this to be very short-lived."
O'Dell says: "The euro has been weakening since its inception and its decline has amounted to around 15%-20%. However, its weakness against the US dollar has helped GDP growth in Europe to recover."
It has also given a boost to European exports and has been particularly good for the manufacturing and car industry. Demand from overseas for European exports has been high, which has stimulated the economy and created more jobs, helping to lower the unemployment level. But the weakness is starting to put pressure on inflation, which could trigger action by the European Central Bank to raise interest rates.
In the short term portfolio and income investments have been overweight the euro which has also made it difficult for it to rise. Investors have invested heavily in the currency, as a convergence between the Europe and the US is expected which will lead to a stronger euro.
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