http://www.usatoday.com/money/economy/2005-05-25-dollar-usat_x.htm
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The U.S. economy is expected to grow 3.6% this year, three times the rate of growth in the eurozone economies, according to a report by the Organisation for Economic Co-operation and Development out Tuesday.
On Monday, the head of the European Central Bank, Jean-Claude Trichet, said he saw "no clear signs as yet of a broadening or strengthening of the growth dynamic" in countries that use the euro.
The high value of the euro is not only hurting European exporters, but also has opened the continent to a surge of Chinese-made clothes and fabrics.
On top of that, high oil prices are burning up corporate profits, Trichet said.
The European Central Bank has little choice but to keep interest rates low, to encourage companies to borrow and invest in their businesses, hire more people and help the economy.
Rising rates in USA boost dollar
Meanwhile, the U.S. Federal Reserve is trying to ward off inflation and raise rates to a more neutral level that neither stimulates nor slows the economy. The Fed has raised its target for short-term interest rates eight times since June, to 3%, and is expected to continue to raise rates through much of 2005 and possibly into 2006.
The widening gap between the two interest rates attracts investors in search of higher returns to the USA. That demand helps boost the value of the dollar.
As of Thursday, an American would have to pay $1.26 to get 1 euro. That's better than in December, when the dollar hit a historic low of $1.36 against the euro.
"And if the economic situation (in Europe) weren't bad enough, you have political uncertainties now working their way into the picture and undermining the euro," Beuzelin adds.
The uncertainty surrounds a new constitution for the European Union, which is a trade and legal alliance of 25 countries. All of the member nations must approve the constitution, and there is a risk that French voters will kill it at the polls this Sunday.
The Vote-Yes campaign says the new constitution would give the EU a permanent president and foreign minister. It also would give the group a louder voice in political, trade and defense issues.
The Vote-No campaign argues that the constitution will erode France's welfare policies, create immigration problems and worsen the already high unemployment rate.
If France, or any of the other skeptical member states such as Great Britain and Poland, vote against the constitution, it will not only have consequences for Europe's relations with the Bush administration, but also for U.S. businesses.
"While flipping hamburgers this holiday weekend, U.S. investors should pay attention to Sunday's French vote," writes Joseph Quinlan, chief market strategist at Global Wealth & Investment Management, in a report to clients. The results, he adds, "will have important implications for U.S. investors ?- whether they know it or not."
If the new constitution is voted down, it could hobble decision-making in the EU and delay agreement on the group's new seven-year budget. It also could undermine some EU reforms and slow the process for adding members, such as Turkey.
Europe is the No. 1 place for U.S. direct foreign investment, and consequently accounts for roughly half the profits made by U.S. companies.
Many companies have blamed or praised the exchange rate for changes in their financial situation. It has hurt such companies as German automaker BMW, Italian drinks maker Campar and French advertiser Publicis.
On the other hand, it has turbocharged sales for the Chrysler division of DaimlerChrysler and other U.S. exporters.
"You could see further weakness in the euro, but a "no" vote is priced into the exchange rate as we speak," Quinlan said in an interview.
He predicted that if the French support the constitution instead of turning it down, the euro could rise a few cents to $1.29.
What should U.S. investors do?
William Hummer, chief economist at Wayne Hummer Investments in Chicago, warns against putting too much money in European stock or bond funds. Asian investments are relatively more attractive, he says.
His other piece of advice: "Now's the time to go" to Europe.
Many Americans are already calling their travel agents.
June hotel reservations at the Novotel near Charles de Gaulle airport outside Paris, manager Corrine Ciochon, says, "are the best they've been in six months
