Euro pushes pound off perch

Brian O'Connor12 April 2012

THE euro has landed - and, in its new, more street-credible version, it had one of its best ever days on the markets, with strong gains against sterling and the dollar. Nonetheless, the real job of making it a healthy international currency has barely begun.

The switch seems to be working fairly well, though it is causing headaches for shoppers and tourists. In Britain, is it beyond the collective wit of the authorities and the retailers to issue a table of fair exchange rate spreads and commission charges? Do not hold your breath.

For the euro itself, after a three-year beating, it was a case of every dog having its day. Early on, it recouped its losses in the pre-Christmas week (when it slid from 90.14 US cents to 87.75).

Then, as the realisation spread that the launch was going smoothly, the markets, always forward looking, began wondering at what rate sterling might go in. That is still a huge if, but it helped the euro to climb from 61p overnight to 62.7p, though it later eased to 62.45p.

Sterling also fell a cent to $1.4440, and its average index tumbled from 107.9 to 106.1, after touching 105.7. The market thinks any sterling entry rate would be considerably lower than at present - HSBC strategist David Bloom puts it between 65p and 67p.

Have the clouds that hovered over the euro for three years really disappeared? Pundits predict that it will strengthen - but they predicted the same when it made its debut in 1999. Since then, it has slumped from $1.17 and 71p. Why did it fall so far?

For its entire life, Europe's big investors have been moving funds out of the eurozone to invest in faster-growing areas of the world - mainly the US.

Is there any reason for this massive outflow to stop? The US economy has faltered and Wall Street has slumped. But Europe has fared little better. Consensus Economics expects the eurozone to at 1.2% this year, the US at 0.9%. Last night's purchasing manager surveys suggest manufacturing orders are closer to recovery in the US and UK than in France or Germany. German officials admit their economy may shrink 0.1% in the fourth quarter, though they see it growing 1% next year.

Another reason for the euro's fall is the simple one that anyone holding it lost out heavily. China and other Asian nations welcomed its arrival, seeing it as a way to cut their dependence on the dollar, the world's dominant reserve currency.

There was talk of China switching one-third of its reserves into euros. That was soon forgotten. Up to recently, just 10% of global reserves were in euros, 79% in dollars.

Some of the factors holding the euro back could last for years. The ambition of its founders is to create a zone as powerful and dynamic as the US. Admirable, but a long way from reality. Every Italian budget crisis, French strike, or German resistance to reforms gives the euro another knock.

Other factors are moving in its favour. Though the investment outflow from euroland was a hefty £50bn for the first eight months of 2001, the last three months showed cash flowing in.

Indisputably, the US is piling up an awesome foreign debt. Last year, its current account deficit swelled to £300bn. In contrast, the eurozone had a £54bn surplus. There are reforms in Europe, often painfully slow, but cumulatively a sizeable step in the right direction.

Arriving in people's pockets does not, in itself, transform the euro from a weak currency to a strong one. Our neighbour nations need good luck and good judgment to make a success of this hugely ambitious project.

We can help them by being clear sighted about the problems and not kidding ourselves that one good day on the markets changes everything.

Create a FREE account to continue reading

eros

Registration is a free and easy way to support our journalism.

Join our community where you can: comment on stories; sign up to newsletters; enter competitions and access content on our app.

Your email address

Must be at least 6 characters, include an upper and lower case character and a number

You must be at least 18 years old to create an account

* Required fields

Already have an account? SIGN IN

By clicking Create Account you confirm that your data has been entered correctly and you have read and agree to our Terms of use , Cookie policy and Privacy policy .

This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.

Thank you for registering

Please refresh the page or navigate to another page on the site to be automatically logged in