Euro Gains Strength - Will Euro Replace Ailing US Dollar?

Source : The Electric New Paper, November 28, 2007

EUROPE'S exporters may be wincing in pain as the euro gains in strength.

But everyone from currency traders to Egyptian street hawkers are looking to the euro as a better store of value as the US dollar keeps slipping. On Friday, one euro was worth US$1.4966 - another record for the shared 13-nation currency.

As well as being the world's currency of choice in central bank reserves, the dollar has long been the de facto second currency in street markets and on tourist menus around the world.

While its downward trend may not cause worry to currency markets, concern is growing that foreign investors may start dumping their dollar-holdings. In particular, traders are watching China's central bank for changes in its portfolio.

The dollar has been falling against the euro and other currencies as fears about the health of the US economy have been stoked by the mortgage crisis that has tripped up borrowers and caused a credit crunch among banks.

Fears over the huge US trade deficit, which leaves more dollars in the hands of foreigners, has also weighed on the currency.

EXAGGERATED CONCERNS?

Yet talk of the dollar's demise has been exaggerated, according to MrPaul de Grauwe, once a candidate for a European Central Bank board seat and economics professor at Leuven university in Belgium. Dollar weakness in the 1980s led to a similar debate, he told The Associated Press.

'There was talk then about other currencies replacing the dollar but it never happened,' he said. 'In the future, the euro will decline.'

For the moment, the euro is definitely up - bad news for the region's exporters.

Plane-maker Airbus has been pummelled by a slumping dollar, the currency in which planes are priced, against a corresponding rise in the euro - in which it pays most of its costs.

Chief Executive Thomas Enders said the euro has now 'crossed the pain threshold.' The rate of the dollar's fall 'is life threatening', he was quoted by Der Spiegel magazine as saying on Thursday.

Still, the stronger euro confers benefits for Europe - holding down energy prices and inflation. And its strength reflects rising confidence in the euro zone and the global prospects of an economically unified Europe.