The value of the euro, the currency of 11 European nations, hit a new low against the dollar today as investors displayed concern about the European economy and the politicians who run it.
In an apparently related move, the yen rose dramatically against the dollar in New York trading after two months of relative stability.
The euro approached a level near parity with the dollar; its low point during the day was $1.007. Since its inception on Jan. 1 at $1.17, the euro has fallen more or less straight down and is now about 13 percent below its starting point.
The yen, meanwhile, traded at 101.87 to the dollar late today in New York, after opening at about 104.50. Its strength renewed speculation in financial markets that the Bank of Japan might intervene in currency markets to lower the yen, out of fear that its high value, which makes Japanese products more expensive overseas, will strangle an economic recovery there.
The yen's increase was sudden, but the euro has headed consistently down since the middle of October. "Sentiment is very bearish about the euro, especially at the end of the year," said Sonja Hellemann, a currency analyst with investment bank Paribas SA in London. "There's a good chance it will go to parity next week."
A falling euro can fuel inflation in Europe by making imported goods more expensive. It is also seen as a blow to dignity by many people in "Euroland," the common name for the 11 countries where the currency is used--Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, Netherlands, Portugal and Spain.
At the same time, a weak euro helps companies that export because their products become cheaper on overseas markets, and many economists say that's what Germany, Euroland's biggest economy, needs right now.
As the euro has fallen during 1999, economists have said over and over that the driving factor was the strength of the U.S. economy. Growth opportunities for U.S. investments have been so good, according to this school of thought, that Europe has been slighted by default.
This new round of declines in the euro, however, springs in part from a new element. The leaders of Germany and France in the past few days have intervened in private-sector affairs, and markets don't like that.
In Germany, Chancellor Gerhard Schroeder first warned against a hostile international takeover of a Germany company. Vodafone AirTouch PLC of Britain is offering a stock deal worth $129 billion to buy Mannesmann AG, like Vodafone a mobile-telecommunications company. Schroeder warned last week that such hostile takeovers "destroy a company's culture."
Then this week, Schroeder helped engineer a $425 million bailout of Philipp Holzmann AG, a bankrupt construction company with 17,000 Germans on the payroll. It was seen as an example of Schroeder's unwillingness to let businesses suffer the consequences of unwise decisions.
In France, meanwhile, the government said it would not allow Coca-Cola Co. to buy Orangina, the popular soft drink brand owned by Pernod Ricard SA. The Finance Ministry said the purchase would give Coca-Cola too much concentration in the French soda market, but the denial also was seen as excessive interference in domestic business.
"Investors from the United States and the the United Kingdom are concerned that Euroland as a whole is not serious about restructuring its corporate and tax system to be fit for international competition," said Jens Dallmeyer, deputy head of international economics for Deutsche Bank in Frankfurt.
The euro's managers also have not been able to assuage investor concerns about the new currency. Wim Duisenberg, president of the European Central Bank, said in an interview in today's Financial Times that "it does give me some concern that a further movement in this direction would contribute to undermining the confidence in the euro of the public at large."
The 11-month-old ECB has not yet openly intervened on currency markets to support the euro, although it raised interest rates earlier this month, which tends to push up the value of a currency. ECB board member Eugenio Domingo Solans was quoted today as saying the bank "has no intention to intervene."
French Finance Minister Christian Sautter told reporters here this evening that "I don't think the euro is weak at all. What we are seeing is the force of the dollar."
When the euro began life last Jan. 1, it was hailed as united Europe's greatest achievement, a path to economic coordination and efficiency that would make the European economy as powerful as the American economy. More quietly, officials said they hoped the new currency would eventually rival the dollar as the world's reserve currency, thereby giving Europe more control over its economic destiny.
One explanation for the impact on the yen-dollar rate was that investors who want to sell euros and acquire yen (the euro has been sinking against the yen) almost always do so by first buying dollars. The second transaction of selling the dollars to buy yen would tend to put upward pressure on the yen in relation to the dollar. However, much of the yen's rise came within minutes this morning, indicating some extraordinary event.
Many Japanese companies, fearful their export earnings will be harmed, have been calling on their government to take action to lower the yen's value.
The United States has been unwilling to help intervene, saying that what Japan really needs to do to get its economy going is to deregulate and stimulate domestic demand. Today, in an interview with Reuters television, Deputy Treasury Secretary Stuart Eizenstat repeated long-standing U.S. policy that a strong dollar is good for the United States economy.
Allison Montgomery, currency economist at market research firm Ideaglobal.com, said that Japanese authorities are likely to watch for whether the Nikkei index of 225 stocks, which has been rising in recent weeks, declines before they decide whether to intervene.
Another complicating factor is that trade ministers from the World Trade Organization meet in Seattle next week amid signs of a deadlock on how to start a new round of trade negotiations. "The last thing the markets need is a signal there is conflict among the major countries of the world on the [WTO] agenda," said Philippa Malmgren, deputy head of global strategy at investment bank Warburg Dillon Read in London.
Staff writer John Burgess in Washington contributed to this report.
CAPTION: APPROACHING PARITY
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