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Dollar Decline Sends Shock Waves through Europe's Bourses

The decline in the U.S. dollar’s foreign exchange rate is increasingly weighing on Europe’s stock markets as investors fear the consequences for export-oriented companies.


Dollars are getting cheaper by the day

The decline in the U.S. dollar’s foreign exchange rate is increasingly weighing on Europe’s stock markets as fears of more expensive exports is causing investors to pull out. On Monday alone, the euro rose by more than one cent to $0.982 against the dollar, and it is now worth 15% more than it was three months ago. At the same time, Europe’s bourses hit new lows, trading just above or already below the levels last seen after the September 11 terror attacks.

"The speed of the dollar decline is what is fatal," said Achim Matzke, analyst at Commerzbank Securities.

"The dollar’s biggest problem right now is the current weakness of U.S. equities, which makes it more difficult to finance the U.S. current-account deficit", added Shahab Jalinoos at UBS Warburg.

A waning of the capital influx into the U.S. – needed to reduce the country’s huge current account deficit – will lead to a further clear decline in the dollar’s foreign exchange rate, analysts said. Investors thus fear a domino effect, leading to an uncontrollable devaluation of the greenback and a subsequent slump in European equities.

Analysts said they expect the euro to remain the investors’ favorite, given the poor dollar sentiment and the uncertain outlook for Wall Street.

The Bank of Japan on Monday once again intervened unsuccessfully on behalf of the dollar in an attempt to reduce the risks for Japan’s export industries. In Europe, export-oriented companies are being forced to change strategy after having benefited for so long from the weakness of the European single currency.

Fear of renewed terrorist attacks and of new accounting scandals added to the gloomy mood on the markets. Shares in Deutsche Telekom, a heavyweight on the Frankfurt market, plunged by almost 8% intraday to a new record low of 8.36 euro before recovering to close with a loss of just over 4%. But finance stocks like Allianz and Commerzbank were also among the day’s losers.

Analysts said that the ongoing stock market weakness was causing investors to pull out of finance stocks, as banks and insurers felt the slump’s impact directly. Their business was also directly burdened by the low trading volumes on the markets as investors turned their backs on the bourse.

In view of the dramatic downturn on the stock markets, this problem is gaining in importance. Europe’s markets have never suffered such a strong decline over a period of years. The Dax-30 German blue-chip index has lost 50% of its value since the highs of March 2000. Its last negative record was booked 30 years ago. Then, the index lost 43% over five years.

The losses on the technology bourses are without precedent. Frankfurt’s Neuer Markt has collapsed by 93% since March 2000, and the U.S. Nasdaq has shed almost 80% over that period. Investors thus increasingly draw comparisons with the Japanese market, which, after hitting a high in 1989, lost 75% of its value – albeit over a much longer period.

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