UK manufacturers are looking forward to a strengthening euro in the coming year, with its attendant potential to relieve the current exchange rate pressures on exports.
The successful switch to notes and coins in the eurozone last week prompted an instant two per cent rise in the value of the new currency against the pound to 62.8p.
The weakness of the euro, combined with the strength of the pound, made selling to the eurozone difficult for UK manufacturers throughout last year.
Uncertainty over practical aspects concerning the launch of the euro is thought to have kept its value down in the run-up to Christmas, at one point dipping below 61p.
But following the launch – and with the prospect of a UKgovernment recommendation to join the single currency – some experts now predict a more favourable exchange rate by the end of the year. The euro is currently hovering around the 62p mark, but for UK exporters that needs to rise by 10-15 per cent to ease competitive pressures.
Graham James, export director for Preston-based coatings manufacturer Liquid Plastics, said the currency will appreciate at some point: ‘It’s my view that the euro should be stronger than it is. Now it’s a reality we may finally see that strengthening. It has been a mystery to us as to why the euro has been so weak.’
City analysts and economists agree that the single currency can’t remain weak for ever, predicting that the UK government’s declared intentions, greater market confidence in the single currency and underlying economic fundamentals will all contribute to a weakening of the pound.
Michael Lewis, director of foreign exchange research at Deutsche Bank, said the UK government in particular holds the key to a euro revival. ‘If they wanted the pound to come down, the announcement of a referendum would do it for them. Otherwise we expect a euro to be worth 65p, maybe 66p, by the end of the year.’
However, said Lewis, a vital part of the solution to the exchange rate problem for UK exporters would be the recovery of the euro against the dollar. (The euro reached a high of $0.9 on its first day before slipping back.)
The euro must make gains against the dollar because the pound trades as a dollar bloc currency, not a European one, said Lewis. ‘That is the key. And a weaker recovery in the US compared to the eurozone will help.’
European financial market adviser Graham Bishop is also convinced the euro must rise this year against the pound. He said the market’s belief that theUK government wants to join will lower the pound against the euro.
‘I wouldn’t dispute predictions of a 70p euro by the end of the year but I think that the rate at which the UK would actually join up would have to be closer to 75p. That is why we are predicting a referendum on 1 May 2003. Of course, for that to happen it must be pretty clear that public opinion in the UK has shifted in favour of joining the euro.’