Weaker euro signals difficult times for European companies

It used to be easy to sum up the way European business executives viewed exchange rates: a strong dollar was good; a strong euro was bad.

Most still think that way, but as the euro glides down from the peak of more than $1.50 it reached in November, trading on Tuesday at $1.37, some problems are emerging that complicate the picture.

Yes, the weaker euro is good for European exporters.

It makes it easier for their cars, machinery and beer to compete on price abroad and makes every sale to the US – and to countries like China whose currencies are closely tied to the dollar – more valuable in euros.

The weakening euro is also good news for Greece, Spain and Portugal, which are suffering from excessive trade deficits and struggling to become more competitive in world markets.

“I haven’t heard of anybody who is sad about it,” said Ralph Wiechers of the German Engineering Federation.

But there is also a range of negative effects.

The cost of oil and other raw materials priced in dollars is rising.

Consumer prices could come under pressure because goods imported from outside Europe become more expensive in euro terms.

The euro’s decline reflects the harsh verdict of investors on the Greek debt crisis and the monetary union’s inability to insure that its members adhere to basic principles of fiscal prudence.

“It’s more of a euro weakness than a dollar strength,” said Ulf Schneider, chief executive of Germany based Fresenius. “The whole world is watching, and there is some doubt about the euro.”

Over the next year or so, analysts say, the euro is likely to continue declining as US growth accelerates more quickly than Europe’s.

And the dollar may get an extra push from the Federal Reserve, which is expected to raise official interest rates faster than the European Central Bank will.

Along with brisker US growth, higher interest rates will make it more attractive for investors to own dollar assets.

“The ECB isn’t expected to raise rates until next year and then move slowly,” said Antje Praefcke, a senior foreign exchange strategist at Commerzbank in Frankfurt, who predicts the euro will fall to $1.20 by the end of the year.