The currency of 12 European Union countries, the euro, has been trading at record highs against the U.S. dollar this week. Economists expect the euro will rise further, as investors may be losing confidence in America's capacity to finance its still growing trade deficit.
The euro is now trading at more than $1.20. That is its highest level since the euro was introduced in 1999. It is a huge turnaround from the euro's low point in 2001 when it cost only 83 U.S. cents to buy a euro.
Kenneth Rogoff, an economics professor at Harvard University and recent chief economist at the International Monetary Fund, believes the euro is rising because the dollar is weakening. Foreigners, he says, have become less willing to finance the U.S. trade deficit, which now equals five percent of U.S. gross domestic product. Mr. Rogoff says during the boom years of the late 1990s the dollar had become greatly overvalued.
"The dollar seems very overvalued on a purchasing power parity basis," he said. "It is overvalued looking at the U.S. current account. But for the world's biggest economy to be borrowing so much of global savings is simply unprecedented."
Mr. Rogoff expects the euro will strengthen to as much as $1.50 to the euro. That would be bad news for European exporters as their products would cost more on world markets.
David Malpass, chief economist at Bear Stearns brokerage in New York, suggests that the dollar may be weakening against the euro because European interest rates are higher than in the United States. Investors generally put their money where they can obtain a higher rate of return. Mr. Malpass does not expect a further sharp fall in the dollar against the euro.
"I don't think we will have a crisis in either the dollar or interest rates. But we really shouldn't be trying to find crises. What is happening is that we're not getting a growth maximizing environment. And so I do think interest rates will have to go up a lot in 2004. But I don't think it is because of the fiscal deficit. It's because we have fast growth and rising inflation, said Mr. Malpass speaking on CNBC television.
European governments, which 18 months ago were worried by the euro's weakness, have been silent on whether they think the euro has become too strong. U.S. financial authorities say there has been no change in Washington's policy of favoring a strong dollar.