The euro jumped to a record high against the dollar on Friday following US President George W. Bush's re-election. Investors fear the US might have trouble attracting enough capital to cover its massive trade deficit.
EU leaders are worried the strong euro could hurt exports
During trading on Friday, the single European currency at one point shot up to 1.2952 dollars, smashing a previous all-time summit of 1.2929 dollars reached on Feb. 18. The euro later fell back to 1.2942 dollars in late-afternoon trade, against 1.2874 late on Thursday in New York.
Dealers were fretting about the economic implications of the electoral win of US President George W. Bush, analysts said.
"It's the same story we've had since the election result was made clear," said Chris Furness, currency strategist at the 4Cast economic consultancy firm.
"On the economic front we may well get growth, but we will get growth at the cost of higher deficits, certainly the trade deficit at least," said Furness, adding that the euro could hit 1.40 dollars within the next year.
Last month, Washington announced a record 2004 budget deficit of $413 billion (€319 billion), while the trade deficit in August rose to $54 billion, the second largest ever.
Dealers are worried about how the US will attract the necessary capital inflows to fund the deteriorating trade balance. The fear is that overseas investors might lose confidence in the debt-ridden US economy, placing their money elsewhere.
EU leaders concerned
In Europe, policy makers voiced concern over the euro's record high. A steady rise in the euro makes eurozone exports more expensive and less competitive and threatens what is already an uncertain recovery.
German Chancellor Gerhard Schröder called the strength of the euro against the dollar "worrying," but added that Germany's export industry was robust enough to manage.
"We can manage that because we are good," Schröder told a news conference in Brussels on Friday.
German Chancellor Gerhard Schröder with French President Jacques Chirac German Chancellor Gerhard Schroeder, right, talks with the French President Jacques Chirac, left, after Chirac'a arrival for the fourth German French Minister Council in the Berlin Chancellery Tuesday, Oct. 26, 2004. (AP Photo/Fritz Reiss)
French President Jacques Chirac and Austrian Chancellor Wolfgang Schüssel said they were concerned euro zone exporters could be hit by the dollar's decline.
"I am a bit concerned by the downward tendency of the dollar," Chirac said on Friday. "Europe would be well advised to consider the consequences this fall could have, notably for its economic activity and in particular for its exports, and possibly draw the consequences."
G7 to discuss rise in euro
German Economics Minister Wolfgang Clement promised that G7 finance ministers would discuss the euro rise should it continue.
"The situation is being closely watched, in particular by the (European) central bank," Clement said. "But there's no reason for concern in developments."
G7 central banks are due to meet for a regular Bank of International Settlements meeting in Basel on Monday. Later this month, G7 finance ministers and central bank governors will meet at a summit in Berlin.