FRANKFURT — 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, but as the euro glides down from the peak of more than $1.50 it reached in November, 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 United States — and to countries like China whose currencies are closely tied to the dollar — more valuable in euros.
The weakening euro also is 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, the chief economist of the German Engineering Federation, an industry group in Frankfurt that represents makers of machine tools and other capital goods.
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.
More important, there is a queasy feeling that the decline of the euro makes an uncomfortable statement about Europe’s chronic tendency to underperform the United States in economic growth.
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 Fresenius, a German health care company. “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 United States 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 United States growth, higher interest rates will make it more attractive for investors to own dollar assets.
“The Fed is expected to raise late this year, and then move more quickly,” 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. “The ECB isn’t expected to raise rates until next year and then move slowly.”
These days, though, what may matter most to businesses is not the absolute value of the euro but its stability. Above all, European business leaders hope the euro will avoid any sudden moves.
“Companies plan a year to 18 months ahead,” Praefcke said. “If there are very strong currency movements, companies don’t have time to react and hedge.”
The last two years have been a roller-coaster ride. After climbing fairly steadily for more than two years, the euro peaked near $1.60 in July 2008. But amid the financial crisis, the euro — and most other major currencies — suffered a series of violent swings. The euro plunged to $1.2453 in November 2008, then gyrated wildly several more times before reaching the recent peak of more than $1.50 in December.
Big moves by the dollar, euro and yen also sent shock waves through less widely circulated currencies in Eastern Europe or Asia. The volatility was expensive for exporters like Volkswagen, which suffered 1.2 billion euros (about $1.65 billion) in costs associated with exchange-rate fluctuations by the Russian rouble and other currencies in 2009, analysts at UniCredit said in a note.
“As these currencies are stabilizing, a significantly lower amount can be expected in 2010,” wrote Christian Aust, an analyst at UniCredit in Munich.
Companies have made strenuous efforts in the last decade to insulate themselves from currency shocks. It is routine even for smaller companies to hedge on financial markets, insuring themselves against future exchange rate movements. In addition, firms like Daimler, BMW or the software maker SAP have expanded operations in the United States to match production costs with sales.
Even rising energy prices are not unambiguously bad for European companies. Costly oil plays to Europe’s strengths in energy-saving technology, spurring demand for wind energy produced by Iberdrola Renovables of Spain or wind turbines made by Siemens or Vestas in Denmark.
Wiechers, the machinery industry economist, said, “It’s a chance to succeed on the market with innovative products.”