International investors seem incapable of ending their love
affair with the dollar. America’s economy has slowed sharply this year, yet its
currency has risen to a 15 year high in trade-weighted terms. Against the eu ro
the dollar touched $ 0.88 -- 8% higher than in early January an close to the
level at which the European Central Bank and the Federal Reserve jointly
intervened to prop up the European currency last September. Why is the euro
looking sickly There are plenty of theories. One is that the
markets do not trust the ECB: the euro-area economies are not immune to
America’s downturn, yet the central bank still seems more concerned with
fighting inflation than with supporting growth. 66. ______.
Most economists reckon that the euro is undervalued and expect a rebound
over the next year. One of the most optimistic is Goldman Sachs, which is
predicting a rate of $ 1.22 in 12 months. 67. ______. He has
found that, over the past decade, movements in the real exchange rate of the
euro against the dollar have closely reflected the difference between
productivity growth in the euro area and in America. When productivity growth in
America has been faster than in Europe -- as it was in most of the late 1990s --
the euro falls, and vice versa. 68. ______. Mr Owen uses
monthly data for productivity growth in manufacturing, a good proxy for the
traded-goods sector. Using annual productivity data for the whole economy (which
are available over a longer period), the broad relationship between the exchange
rate and relative productivity growth in America and Europe seems to have
persisted for most of the past 30 years. Mr Owen reckons that,
in the short term, America’s downturn will reduce the productivity gap between
America and the euro area -- and so boost the euro. 69. ______.
Only if the downturn completely kills the belief in America’s new
paradigm, and its productivity growth plummets, will the euro be able to rebound
more permanently. The strength of the dollar this year does
indeed seem to hinge on a belief among investors that America’s slowdown will be
brief, and that in the longer run America remains the best place in which to
invest. But they may be underestimating the potential for productivity gains in
Europe, as the single currency boosts competition and encourages firms to
exploit economies of scale through mergers and acquisitions, The adoption of
more flexible working practices in many countries should also help to improve
productivity. Studies in America suggest that the bulk of its
productivity gains from information technology come from the use of IT rather
than from its production. [A] So the euro area, too, should
start to enjoy productivity gains over the next decade, as it makes full use of
IT. If you believe that Europe really is starting to change, buy euros. If not,
stick with the darling dollar. [B] This is exactly what economic
theory would predict: Countries with faster productivity growth in the
traded-goods sector should see rising real exchange rates. [C]
Some euro-skeptics worry that the expanding power of the European Union will
eventually lead to the merger of today’s European countries into one new
country. They believe that possibility becomes stronger if Britain joins the
euro. But pro-euro activist Nick Canning says such fears are
unfounded. [D] Another more plausible explanation is that, in an
uncertain global economic climate, the dollar has resumed its traditional role
as a safe-haven currency. [E] But an analysis by David Owen, an
economist at Dresdner Kleinwort Wasserstein, gives pause for thought.
[F] But in the long term, he expects productivity growth to remain faster
in America -- in which case, a sustained rise in the euro is unlikely over the
next few years.