Euro Vision
The year 2003 was fabulous for Europe's fledgling currency, the euro. Against the dollar, the euro advanced some 19% from the first to the last day of the year. And as 2004's trading year starts in earnest, it looks like more of the same.</br></br>One would think European Central Bank officials would be dancing in the streets because of the euro's obvious success. But on the contrary -- there is much nervous fretting and fussing in Frankfurt that the currency is too high, that its ascent has been too fast, that something might have to be done about the strong currency, and other such nonsense. In today's Europe, it seems, nothing fails like success.</br></br>There are, in fact, two reasons why the euro is appreciating. The first is the combination of relatively strong U.S. economic growth and Alan Greenspan's refusal to raise interest rates. The stronger the U.S. economy, the bigger the external deficit -- and the greater the need for higher interest rates to attract sufficient capital inflow into the U.S. to finance the deficit. Without the rate hike, the dollar goes down because the capital inflow will not be sufficient to finance the trade imbalance.</br></br>The Europeans long have stressed the need for dollar devaluation to correct the U.S. current account imbalance. Now that the correction has come, many are having second thoughts.</br></br>The second reason for the euro's strength is the credibility of the ECB's monetary policy. Because the ECB's Governing Council has been doing such an outstanding job of pursuing a price-stability-based monetary policy, central banks throughout the world -- but especially in Asia -- are converting dollars into euros.