BERLIN - After a year in which the U.S. dollar fell 5 percent against the euro, the sharply weaker currency isn't expected to rebound soon - and that means it will likely keep eating into European exports, growth and jobs through next year.
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The euro peaked at $1.3470 on Dec. 7, after reaching a series of new highs against the dollar. Some forecasts see it heading past $1.40 in 2005 - unhappy news for exporters whose goods become more expensive against foreign competition, politicians who want to see more jobs and central bankers waiting for Europe's shaky recovery to take off.
While the current slide, which has brought the dollar some 9 percent lower since Sept. 1, appears to have taken a breather, traders and economists say it's not over yet. Concerns over the U.S. trade and budget deficits are thought to have been the main driving force behind the euro's rise, and financial markets have disregarded U.S. professions of a "strong dollar" policy.
"I think it's very dangerous to say it's stopped," said Lee Ferridge, proprietary trader at Rabobank in London.
The dollar may recover against the euro slightly in the first part of next year - just as it did in the first part of 2004. But then it resumed the slide that has taken it down about 61 percent from its peak against the euro in October 2000.
Ferridge sees the euro at $1.35 by the end of the year. Others, such as economists at Deutsche Bank, see the currency as high as $1.43 by the end of 2005.
For the euro zone economy, this is gloomy news. Growth, which was just starting to click after a sluggish 0.8 percent increase in gross output in 2003, slid in the third quarter as the stronger euro took a bite out of exports. Growth this year has eased from 0.7 percent in the first quarter, quarter on quarter, to 0.5 percent in the second and 0.3 percent in the third. Concern is especially serious in Germany, whose economy - Europe's largest - is heavily dependent on exports.
Germany's auto companies - who have a major export product - all took out hedging contracts in currency futures markets to insure their earnings against currency fluctuations, but those measures eventually expire. The stronger euro could have a significant impact on earnings in 2005, as most of the hedging contracts will expire during the year, said auto analyst Georg Stuerzer at HVB Group in Munich.
Only Porsche AG - hedged until 2007 - is immune, while BMW, Volkswagen AG and DaimlerChrysler AG's Europe-based Mercedes Car Group will see hedges expire, Stuerzer said.
Any rate above $1.20 represents a "the pain boundary" for Germany's many smaller industrial companies that make parts or industrial equipment for other businesses, said Ralph Wiechers, chief economist at the German Engineering Federation.
"Many enterprises are reckoning with that as a long-term average, and anything higher is a headwind," he said. Some two-thirds of sales in the sector are outside Germany.
Although it's an overall negative, there are small consolations from a weak dollar. A stronger euro insulates European companies from much of the recent rise in oil prices, since oil is priced in dollars. And it helps keep inflation down by cutting the price of imports.
With growth uncertain due to the strong euro, some economists think the European Central Bank will stay locked down in its wait-and-see stance throughout the year, keeping the key refinancing rate at 2 percent for fear that an increase would be more than the economy could bear. The rate has been unchanged since June 2003. But other economists expect rates to go up.
Claudia Windt, senior economist at Helaba Bank in Frankfurt, said that as long as the world economy keeps growing, the European economy should weather the stronger euro. But she said a shock to the system - such as the strong euro combined with a slowdown in the United States - would lead to a recession.
The latest figures from the United States showed both the trade deficit and the current account deficit at record highs.
President Bush has pledged to work with Congress to reduce the government's budget deficit as a key step in assuring the world that his administration supports a strong dollar. But the government hasn't taken steps to break the dollar's slide, and economists believe the administration sees the weaker dollar as a boost to U.S. exports.
By making U.S. goods less expensive to foreign buyers, a weaker dollar bolsters U.S. companies' competitiveness in international markets.
Windt sees the euro at $1.40 in six months, and at $1.30-35 in a year's time.
"We see the effect as limited," Windt said. "It will certainly hurt on the export side... but an exchange rate is a coin with two sides."
