The currency markets generally tend to provide a fair reflection of the underlying economic trends in each respective currency bloc. The euro's continued weakness against all other currencies would seem to suggest that the markets are sceptical about economic recovery in the euro zone.
The euro is now firmly below the psychologically important parity level against the dollar and is hovering around the 100 level against the Japanese yen.
The tone of economic data coming out of Europe belies this weakness in the currency. Economic indicators from consumer and business sentiment reports to data on industrial production and exports have generally pointed to robust growth for this year.
For example, recent figures show car sales in western Europe rising to the highest level in a decade. Registrations in February 2000 rose to 1.18 million units. Interestingly, Irish registrations were more than 30,000, comfortably exceeding sales in economies such as Greece, Portugal and even Switzerland.
Strong economic growth in Italy, France and Spain powered the demand for new cars. Forecasts for economic growth in Europe for 2000 have now edged up to 3 per cent and unemployment rates are falling gradually. Therefore, it is necessary to look elsewhere for clues that may explain the euro's continuing weakness.
At least part of the explanation would seem to be that however well Europe is doing, America continues to do even better. Also, the long-suffering Japanese economy is finally showing signs of a sustained economic expansion.
While the overall economic picture in Japan continues mixed, currency investors would seem to have latched on to those that point to recovery. For example, data showing a leap in capital expenditure for the final quarter of last year led to a surge in the value of the yen.
Meanwhile, the US economy has continued to go from strength to strength. The most recent figures for retail sales showed an acceleration in the pace of spending in February, following a slowdown in January. Retail sales in the US grew by 8.9 per cent in 1999, which was the largest increase since a 10 per cent rise in 1984.
Instead of slowing down in 2000, as many had predicted, spending seems to have accelerated. This is backed up by a report from the Federal Reserve that showed consumers borrowed in January at the fastest pace in almost four years.
All of this growth is maintaining upward pressure on US interest rates and this is one of the key factors underpinning the strong dollar. Expectations are for further rises in US interest rates until there are clear signs that the economy is slowing down.
Although, interest rates in Europe are also rising they remain lower than in the US. Also, if anything this gap could widen slightly in coming months. European growth is simply not yet fast enough to justify a substantial rise in European interest rates.
Therefore, a recovery in the foreign exchange value of the euro is very much outside of the hands of Europeans. As long as the US economy continues to enjoy its current phenomenal growth rate, the euro is going to find it very difficult to bounce back.
