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Mar 6, 2015 11:35 AM

Euro drops toward parity with dollar

The Associated Press

LONDON (AP) The euro could soon be doing something it's only done a couple of times in its 16-year existence trading 1-to-1 with the dollar.

And its decline could further help the economy of the 19-country bloc as well as U.S. tourists by, for example, making it less expensive to buy a trip to the Italian Riviera instead of the Outer Banks.

The European single currency has been on the slide since May, when it traded as high as $1.40, while the dollar has been rising across a range of currencies. On Friday, the euro bought $1.0850, the lowest since 2003.

That rapid shift is having an impact on both sides of the Atlantic.

For U.S. visitors, Europe is getting cheaper. On the street the Champs-Elysees, in fact euros were selling for $1.039 apiece in currency booths. Which means an American can get more for their buck in Paris' luxury shopping quarters.

For many European countries, tourism revenue matters a lot. Cash-strapped Greece earns around a fifth of its money from tourists. Businesses there are reporting increased interest from U.S. holiday seekers.

"The cheap euro makes Greece more attractive, and we have a very positive picture from the U.S.," said Andreas Andreadis, head of the Association of Greek Tourist Enterprises.

In the longer term, the main impact of the weaker euro will likely emerge as companies plot their strategies. Big European exporters of high-value goods, particularly in Europe's large economies, like Germany, stand to benefit. Those in the U.S. will get pinched.

Anke Rindermann, a senior analyst at Moody's, said the euro's fall "will be positive for companies that have the majority of their cost bases in the euro area and significant sales to regions outside it."

Carmakers BMW, Daimler and Volkswagen all fall in that category, she said, as they export a high proportion of their production to the U.S.

The impact is not the same for all companies, though. European airlines, for example, could be hurt, as most of the rising demand for travel to Europe would likely be captured by non-European airlines.

The euro has been falling mainly because of the divergence in economic performance between the eurozone and the United States. Where the eurozone's recovery from the global financial crisis has been at best anemic, the U.S. economy appears to be going from strength to strength.

The currency movements are mainly driven by the actions of each economy's central banks. While the European Central Bank has slashed interest rates and launched a massive money-creating stimulus, effectively diluting the value of the euro, the U.S. Federal Reserve is doing the opposite it's preparing to raise interest rates following its decision last year to bring an end to its own multi-year stimulus.

Friday's U.S. payrolls figures highlighted that divergence. The forecast-busting 295,000 increase in jobs in February ratcheted up expectations that the Fed would start raising interest rates as soon as June. That prompted a flurry of dollar buying, with the euro sliding 1.6 percent to $1.0858.

"Overall, the market is happy to sell the euro, but after such a strong, sustained downtrend, the road to parity may not be a straight line," said Kathleen Brooks, research director at Forex.com.

Since its launch in 1999 at a rate just below $1.18, the euro has spent most of its time above current levels.

In its early days, the euro was relatively friendless, and in late 2000, the European Central Bank and other central banks intervened in the markets to prop up the ailing currency, which at one stage fell to a low of a little over $0.82.

That appeared to help and the euro staged a rebound, pushing back above parity with the dollar in late 2002. By the summer of 2008, just before the global financial crisis took a particularly damaging turn with the collapse of U.S. investment bank Lehman Brothers, it struck its all-time high just above $1.60.


Jamey Keaten in Paris contributed to this report.


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