Euro remains undervalued against US dollar

THE US dollar has lost considerable ground against the euro over the past 12 months with a move from about $0.86 in February 2002 to around $1.075 today.

This 25% rise in the euro has contributed to an increase of 11% in the overall trade-weighted value of the euro. Over the same period, the euro rose by almost 12% against sterling and by over 15% against the yen.

At a current trading range of $1.06-$1.09, the euro remains undervalued against the US dollar. European Central Bank officials have generally spoken favourably about the rise in the value of the euro, seeing the appreciation as a vindication of the sound underlying performance of the eurozone economy and the ECB’s stewardship of monetary policy. However, there must be some concern that the dollar could continue to decline, jeopardising the contribution of the foreign trade balance to the eurozone’s modest growth performance. Based on the burdens facing the US economy, Europeans would be justified in worrying about the prospects for the US dollar. The US faces the burden of its war on terror and the risks to the economy of the geopolitical risks associated with its determination to disarm Iraq. Apart from the Iraqi crisis, there are other political hotspots around the world that are likely to weigh on the outlook for the US economy.