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By Anne D. Picker, International Economist, Econoday     Monday, August 25, 2003

Currencies
The euro hit new four-month lows against the dollar, as investors fretted about the state of the European economy. Four European countries - Germany, France, Netherlands, Italy - are now in recession. In contrast, the U.S. economic recovery is pulling up the beleaguered dollar against the euro and in the process possibly jeopardizing the benefits that many American corporations have been enjoying from a weaker currency. Earlier this year, the dollar was sliding precipitously against the euro, making U.S. exports cheaper on international markets. That, in turn, supported U.S. economic growth but made European goods less competitive and suppressed the eurozone's ability to break out of the economic doldrums. But the dollar has bounced back, gaining about 8.4 percent against the euro since May 29th. The strength of the dollar, if sustained, could raise questions whether the currency will reverse the economy's nascent revival.

According to the research director of First Call, Chuck Hill, currency movements were an important factor in second quarter sales increases reported by large companies. In addition to the impact on a company's competitive position, the dollar affects the way companies report their income. When the dollar weakens, a sale made overseas in a foreign currency translates into more dollars back home. But European corporate executives and government officials will view the weakening euro as welcome relief since it should make their goods more competitive on world markets.

The Canadian dollar weakened against its U.S. counterpart on a mix of poor data, bearish official comments and continuing problems with the blackout. John Manley, Canada's finance minister, said on Wednesday that he expected zero growth in the second quarter due to SARS and strength in the country's currency. Parts of the province of Ontario continue to be without electricity. Manley said it was difficult to estimate the economic impact of the blackout, which has forced some of the region's manufacturers to reduce output.

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