A.G. EDWARDS & SONS, INC.
One North Jefferson, St. Louis, Missouri
314-955-3050
(March 9, 2000) CURRENCIES: "We're pinching ourselves, wondering how long this will continue..." Richard Burrows, CEO, Irish Distiller's Group. What Mr. Burrows is wondering about is the persistent weakness of the Euro. While the weak currency is raising inflation fears among policy makers in Europe, and unemployment concerns in the U.S., it is a bonanza for European exporters. The weak Euro has helped Mr. Burrows company export more Irish whiskey to the U.S. It has helped in other ways. European firms with U.S. operations are gathering currency gains through repatriation.
Euro Exchange Rate
This chart shows the monthly Euro. Obviously, the Euro did not exist prior to January 1, 1999. This series is a synthetic Euro, created by Haver Analytics. Technically, we are in a free fall. There is really nothing to stop the decline until the 1985 lows are reached, at 7100. Will we get there? Only if the Clinton Administration allows it. I think the Europeans are content to allow the Euro to decline, due to its positive impact on growth. Until the U.S. becomes worried about the impact of the Euro's weakness on the economy, the Euro will likely weaken further.
On the previous chart, we show the Euro's theoretical bottom coinciding with the Plaza Accord. This accord, developed by the G-7 nations, occurred in early 1985 in response to the dollar's strength and the problems it was causing for the U.S. economy. A political consensus developed to push the dollar lower. The major industrialized nations decided the dollar's strength was harming the world economy, and extraordinary political steps were necessary to correct its trend. We may be heading into a similar period with the Euro. Given consistent improvement in the European economy, one could argue the Euro is undervalued. However, the trend in place appears rather solid, and it probably won't change without concerted intervention and political "jawboning." We don't expect this to happen until the administration sees the weak Euro as a threat and we don't expect that to happen until the U.S. unemployment rate rises.
Bill O'Grady