Euro's Plunge Shows No Signs of Abating - TheStreet

BERLIN -- After lamenting the euro's prolonged slide for months, even the most ardent supporters of the beleaguered currency now appear resigned that it will continue to slip.

Thursday the euro hit a new all-time low against the dollar, ahead of economic data Friday that are expected to show that America's economy continues to grow at a faster rate than Europe's. In late European trade Thursday, the euro was at 82.74 cents.

The euro's prolonged skid was halted briefly after the world's leading central banks intervened in the foreign exchange markets Sept. 22. But the descent began anew after

European Central Bank

President Wim Duisenberg made remarks in a newspaper interview that led traders to believe further immediate intervention to support the euro was unlikely.

Red-Faced

Since the euro's inception in January 1999, the currency has dropped an embarrassing 30% against the dollar. Some euro-zone politicians, most notably German Chancellor Gerhard Schroeder, have tried to accentuate the boon to the region's exporters. But as the euro now appears set to continue its limbo act, the real possibility of longer-term damage from the currency's weakness looms ever larger.

While it's true that euro-zone exporters have gotten a boost from the limp euro, companies on both sides of the Atlantic are now facing rougher times due to the currency's woes. Numerous U.S. companies with operations in Europe have seen their profits eroded by the euro's fall, prompting in recent weeks earnings warnings from companies including

DuPont

(DD) - Get Report

,

McDonald's

(MCD) - Get Report

,

Gillette

(G) - Get Report

and

Newell Rubbermaid

(NWL) - Get Report

.

On the other side of the ocean, once-giddy exporters that saw business boom as the euro fell and their goods became cheaper abroad are also beginning to worry. Producers are becoming concerned a further weakening of the battered euro could seriously eat into their margins, as dollar-denominated goods necessary to do business -- in particular energy products -- become prohibitively expensive. On Thursday, the head of a leading German foreign trade federation described the weak euro "like doping, but with considerable side effects" for the country's exporters.

Partly brought on by surging oil prices, but exacerbated by the weak euro, inflationary pressures have begun to spring up all over the place. In September, euro area consumer prices jumped 2.8%, exceeding the ECB's 2% definition of price stability. The worse case scenario, of course, is the ECB has to ratchet interest rates higher to contain spiking inflation, choking off growth in the process. That would in turn weaken the euro against the dollar, which would then again aggravate inflation problems in the euro zone.

Marble or Linoleum?

"Until the euro looks to have found a solid floor, it's premature to believe that the interest-rate cycle is already close to its peak despite signs that growth may moderate," says Catherine Lee, an economist for the

Royal Bank of Scotland

in London.

A stronger euro would certainly help alleviate some of the need for higher borrowing costs, but with coordinated central bank intervention highly unlikely before the U.S. presidential election in November, the currency is almost sure to trend lower in the coming days. How low is anybody's guess at this point, but some observers think the horrific slide could reach its nadir around 80 cents.

"This is a dangerous thing to say, but I can probably see it bottoming out between 79 and 82 cents," says Paul Downs, a forex analyst with

Currency Network

in London. "There appeared to be the first indications today that sentiment might be starting to turn a tad."

But beyond any quick central bank-inspired recovery, there will inevitably be a lengthy path to restore longer-term confidence in the euro. Says Lee from the Royal Bank of Scotland: "European policymakers still have a gargantuan task ahead of them to reverse pessimism on the currency."