Euro may remain volatile

  • Business
  • Wednesday, 07 Apr 2004


LOCAL companies affected by the euro’s two-year long appreciation and expecting a reprieve after the currency fell to a four-month low against the US dollar at US$1.1995 yesterday, could still see their hopes dashed.  

Foreign exchange strategists say the euro could be in for a roller coaster ride this year. 

Although the greenback gained strength after a series of better US economic numbers recently beat more depressing ones emanating from Europe, continuing volatility could be a medium-term reality, as questions remain on the sustainability of the economic recovery in America, analysts said.  

The dollar’s rebound was sparked by data last Friday which showed US jobs had grown by far more than Wall Street had expected. And, on Monday, a report from the Institute of Supply Management highlighted a more buoyant American services sector. 

Finally, speculation that the European Central Bank (ECB) would be cutting interest rates before the year-end, and unemployment figures in Germany showing even more people out of work, ensured that selling pressure on the euro was sustained over the past few days.  

The euro had gained 12% against the US dollar over the past 12 months partly because the ECB kept its benchmark interest rate at 2%, twice that of the Fed. 

A senior treasury trader at a regional bank said those who had been hoping for a stronger US dollar against the euro might have to need to wait until mid-2005, even as the short-term weakness of the euro might see it correcting further.  

“We seem to have finally found resistance in the euro’s strength,” the Kuala Lumpur-based trader told StarBiz yesterday, adding that the euro’s upward trend since 2002 was starting to be disrupted.  

“Going forward, it will no longer be a one-way bet, but in the medium term – in the next one year or so – we can expect some volatile movements,” he said. 

The US$1.40 rate against the euro, cited by economists as one of the “breaking points” that could trigger a review of the ringgit peg, “will unlikely be reached,” he added.  

Adrian Foster, director of forex strategy at Dresdner Kleinwort Wasserstein, said despite the recent weakness, the euro would outperform the greenback this year.  

“But in the near term, the euro has minimal upside as expectations grow of an ECB (interest) rate cut, and as increasing numbers of people expect the US Fed to lift its rates,” he said. 

Foster also said he did not expect the Malaysian government to review the ringgit peg of RM3.80 against the US dollar this year.  

“The peg offers many benefits in terms of stability to the overall economy,” he said. B 

ut, conversely, this has increased the cost of imports with the US dollar’s general weakness. Inflationary pressures are also higher than they would otherwise be due to higher import prices. 

At a more micro level, how companies have coped is instructional. Germany-based luxury sedan maker BMW said currency fluctuations were “part and parcel” of its global business, and the group preferred to take a long-term view on the situation, “with an emphasis on stability.”  

Its managing director in Malaysia, Wolfgang Schlimme, said it adopted hedging strategies for the short term, and localised supply chains in the medium term.  

“These strategies have worked very well for the group, and we are confident of going forward. In fact, our first quarter sales for BMW Malaysia this year showed a 30% increase over the corresponding period in 2003,” he said, claiming a degree of success despite the euro’s rise.  

French cosmetics maker Thalgo said despite the narrowing margins, raising prices would be considered only as a last resort due to the competitive nature of the business.  

Instead, the company intends to widen its range of products and make them more accessible to customers as a means of boosting sales to overcome the margin squeeze. 

A spokesperson from its Malaysian distributor told StarBiz the company had been “pretty hard hit” by the appreciating euro, causing it to raise prices by 2%-5% in January.  

“As the price increase was quite small, our sales were maintained. Again, raising prices will be a last resort for us should the euro continue to strengthen,” she added. 

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