2012.05.09 17:58:00 HEARD ON THE STREET: Weak Euro Arrives Too Late

By Richard Barley A DOW JONES COLUMN The seemingly bulletproof euro has finally taken a hit: it is below $1.30 for the first time since January. A weaker euro, all things equal, should be welcome in propping up euro-zone exports and hence growth. But the problem is that euro weakness is coinciding with jitters about U.S. growth. A slowdown in world trade would likely far outweigh any support from exchange rates. At $1.294, the euro is now some 11.4% lower than its April 2011 peak against the dollar. Even so, the puzzle has been why it isn't even lower, given the trials the euro zone faces. The biggest factor explaining it is a traditional one: relative monetary policy expectations. Early last year, the European Central Bank was actually raising rates while the U.S. Federal Reserve was committing to ultra-loose policy. Now the ECB is seen as potentially the more dovish of the two, with room to deliver rate cuts or another long-term refinancing operation. Many strategists think the euro could fall further toward $1.25 if that perception holds. A decline in the euro could help ease the strains of adjustment in peripheral countries. While countries such as Spain or Italy cannot devalue individually, a depreciation in the euro could make euro-zone exports as a whole more competitive. That would undoubtedly be welcome, albeit not a quick fix: exchange-rate changes take two to three quarters to feed through as exporters adjust. A European Commission study shows that the 22% depreciation in the euro real exchange rate between 1996 and 2000 added 0.5 percentage points to annual euro-zone export growth, while the subsequent 16% appreciation between 2001 and 2006 shaved 0.6 points off export growth. But it also showed that by far the biggest factor in export growth was buoyant expansion in world trade over that period. If U.S. growth was strong, a weaker euro would be good news. But for now, euro weakness is coinciding with falling risk appetite caused in part by U.S. growth fears. Meanwhile, financing conditions for peripheral countries are tightening, with Spanish bond yields above 6% again. Even a continued decline in the euro seems unlikely to offset those pressures. (Richard Barley is a writer for Heard on the Street. He has covered the European credit market in one form or another since 1998. He can be reached at +44-20-7842-9406 or by email: richard.barley@dowjones.com; follow him on Twitter at @RichardBarley1) TALK BACK: We invite readers to send us comments on this or other financial news topics. Please email us at TalkbackEurope@dowjones.com. Readers should include their full names, work or home addresses and telephone numbers for verification purposes. We reserve the right to edit and publish your comments along with your name; we reserve the right not to publish reader comments. (END) Dow Jones Newswires May 09, 2012 11:58 ET (15:58 GMT)