Pessimism abounds over the prospects of the European Central Bank intervening to keep the euro from falling further.
A key downside factor for the unit is a flight of money from Europe to the U.S.
European firms have jumped on the bandwagon of buying into U.S. firms through mergers and acquisitions, creating new demand for dollars.
They have geared up for increased equity investments in the U.S., both through stock purchases and direct purchases of equity interest.
Another major factor behind the euro’s weakness is the disappearance of foreign exchange risks within the euro zone.
Roughly half of the external trade of the 11 euro countries is confined to the euro zone, and the depreciation of the euro against the dollar and the yen has had only a limited impact on their real economies.
Besides, European exports to markets outside the euro zone are booming thanks to a weak euro.
Ironically, however, European countries have fallen into an ambush — a steep runup in crude oil prices.
The euro’s fall has added to the higher cost of obtaining oil imports in Europe.
Oil prices have hit a 10-year high on the world market, a level unseen since the Gulf War, setting off protests by European truckers, farmers and other consumers against high gasoline prices.
The ECB has expressed concern over the euro’s weak showing but has not intervened to reverse the direction of its value.
The ECB has decided to sell interest returns on its foreign exchange reserves, but the move has proved to be far from enough to help shore up the euro.
The weak euro not only fuels inflationary pressures in the region but undermines much-needed structural reforms in industries.
Indeed, the euro’s fall has helped European exporters improve their competitiveness on the world market, leaving them less eager to press forward with their structural reform programs.
The European countries decided to get rid of their own currency sovereignty and take a chance on a common unit. The falling euro may be a warning from the market that the intended changes may be delayed.
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