Euro's decline leads to intervention from Central Bank

The World's largest central banks -- including the U.S. Federal Reserve, the Bank of Japan and the European Central Bank -- attempted to put an end to their financial woes that have been developing since the launch of the euro in January 1999. The banks purchased an estimated $10 billion in euros to put an end to its 19-month decline.\nSince the launch of the euro at $1.17, it has done nothing but head south, reaching an all-time low of $.8474 Sept. 21, down nearly 30 percent. The banks' intervention the next day managed to prop up the euro to nearly $.90, only to see it finish the session at $.8787. The euro managed to hit a new low nearly every day last week.\nThe decline of the euro has sparked inflationary fears throughout the "Euro Zone." The recent surge in oil prices has further buttressed inflationary fears because European countries buy their oil in dollars, meaning a rise in petroleum prices has been even tougher for the "Euro Zone" to swallow.\nBefore leaving for Prague, Lawrence Summers, the U.S. Treasury Secretary, told reporters the intervention was geared to prevention from a weak euro from a dampening of Europe's potential growth. \nInflation would force Europe's Central Bank to raise interest rates, which is like applying the brakes to an economy because businesses and individuals have to pay higher rates to borrow money, making it less attractive. On the other hand, it attracts investors to Europe because they earn higher rates on their money. It would cause an inflow of foreign funds, increasing the value of the euro as more people demand euro denominated assets (i.e. bank accounts) and their higher returns. \nCurrently, the opposite is taking place. Europeans are trading in their euros for dollars and buying U.S. stocks in huge albeit slowing amounts. In the second quarter, Europeans bought $34.64 billion more in U.S. stocks than they sold in the first quarter, according to the Wall Street Journal. The number has slowed from $58.67 billion in the first quarter of 2000, but the effect has been the same, a sliding euro. The Journal said U.S. markets are more favorable to investors than European markets because they offer higher returns. \nInvestors appear to have decided the European Union isn't implementing its promised reforms fast enough. Horst Köhler, the managing director of the International Monetary Fund, told Reuters News Service, "Europeans have to accelerate this process of structural reform." \nKöhler blames the currency's decline to the slow moving governments of Europe and their lethargic implementation of structural reforms, ranging from modernizing tax laws to decreasing the paperwork involved with starting a business and soft labor laws.\nThe United States' participation was one of the biggest surprises coming from the Sept. 22 intervention. Summers is a fervent advocate of non-intervention as well as a steadfast supporter of a strong dollar. A strong dollar helps keep inflation low and imports cheap. If the dollar weakens, the price of imports would go up, forcing the Federal Reserve to raise interest rates. The effects would be the same as in Europe -- hitting the economic brakes.\nAs the dollar gets too strong, U.S. companies' competitiveness dwindles. Their products become too expensive relative to other countries' goods. For example, U.S. multinationals like Gillette, DuPont and McDonald's have all lowered their third quarter earnings, mostly blaming a weak euro's dampening European sales. Even more notable was Intel's announcement Sept. 21, that its growth will slow. Intel too blamed slowing demand on a weak euro. The company's stock dropped by more than 20 percent, knocking off more than $80 billion from its market cap.\nSummers, as well as other major Central Bankers, agree the euro needs to gain strength to prevent a slowing of the "Euro Zone's" growth and to avoid a meltdown of the U.S.'s stock markets, home to the savings of much of the industrialized world.\nThe question still remains: will Sept. 22's intervention be enough to turn around the debilitated currency's 19-month decline? The Central Banker's actions in the next few weeks could very well shape the world's growth in the next five to 10 years.