Word: dollarized
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American Christmas shoppers in Paris aren't the only ones suffering from sticker shock. The dollar fell to a near-record low of $1.33 to the euro at the end of last week. It has shed about six cents since early November, shattering months of calm on currency markets, causing a mini-swoon on some stock exchanges and prompting French Finance Minister Thierry Breton to call for "great collective vigilance." The dollar has also slid against the British pound, which closed last week just a few cents short of $2, its highest in 14 years. Many investors are betting that...
...month. In Washington, meanwhile, the new Federal Reserve chairman, Ben Bernanke, has ended the series of rate increases introduced by his predecessor, Alan Greenspan, and Wall Street has been anticipating the start of a period of cuts as the U.S. economy loses momentum. This transatlantic divergence is pushing the dollar down. (Note, however, that Bernanke sounded a hawkish note in a speech last week, saying that inflation remained "uncomfortably high" - an indication that he won't be reducing rates soon.) The big question is whether the dollar will continue its decline over the next several months, or whether the recent...
Despite some jitters, few are panicking yet. Jean-Michel Six, head of economic research at Standard & Poor's in London, reckons the dollar will fall to between $1.42 and $1.45 against the euro by mid-2007, but even at that level, "we do not expect any significant impact on overall growth" in Europe. German machinery companies are currently operating at over 90% of their potential capacity, the highest since 1990, and are thus well able to weather a weaker dollar, says Olaf Wortmann, an economist at the German Engineering Federation...
...next clue about the dollar may come from Japan, where traders are now speculating on whether the Bank of Japan will raise rates later this month. The Japanese economy has been recovering from stagnation, and the bank in July ended its policy of keeping interest rates at zero. But rates remain very low - just 0.25% - and a hike could put further pressure on the dollar...
...present level is bad enough for Kathryn Wimmer, an apparel designer from Portland, Oregon, who was visiting a friend in Paris last week. "When I came here six years ago, things were a little expensive," she says. "Now you just watch the dollar going down every day. Pretty soon it's going to be hard just to come here." As for Christmas shopping in Europe, forget it. This year, Wimmer's only buying postcards...