The euro broke through $1.20 for the first time in its nearly five-year history Friday, surging amid fears about the U.S. trade and budget deficits in thin post-Thanksgiving trading.
The 12-country currency hit $1.2015 in European trading, the highest since it was introduced on Jan. 1, 1999, then slipped back to $1.1995.
It started the European trading day at around $1.19, then headed steadily up, breaking through the previous high of $1.1979 from Nov. 19. In New York, the euro traded at $1.1982 at midday Friday.
Economists and currency strategists said short-term trading tactics and thin volume on the day after the U.S. Thanksgiving holiday played a role. Lower trading volume can make markets more volatile.
But general fears about the U.S. trade and budget deficits — factors that can undermine a country’s currency — continued to weigh on the dollar as they have for months.
The weakening currency helps U.S. businesses against foreign competitors by making U.S. goods cheaper in comparison. But it makes imports and foreign travel more expensive for Americans.
The dollar also hit a five-year low against the British pound, making the sight of Big Ben and parliament about 7 percent more expensive since the start of this year. The euro bill for that favorite hotel on the Left Bank in Paris will cost 14 percent more.
Friday’s dollar dip “is not economic fundamentals,” said Nikolaus Keis, an economist at HVB Group in Munich, noting the absence of any new U.S. economic data on Thursday and Friday. Keis said some traders had taken advantage of a slight dollar rise earlier in the week to sell and take profits, driving the dollar back down.
But dollar weakness — against other major currencies, not just the euro — “is a secular trend because of the huge twin deficits (trade and budget) in the U.S.,” he said.
Keis said the dollar could recover a bit on stronger U.S. economic news over the next several months, but he forecast it would reach $1.25 by the end of 2004.
Michael Schubert, an economist at Commerzbank in Frankfurt, said the euro was driven by speculation that it could keep going to more new highs.
“In principle, the tendency is still upward,” he said. But he predicted the euro is unlikely to go far above $1.21 or $1.22.
Another factor that has weighed on the dollar in recent days was the decision by the Bush administration to impose trade restrictions on imports of Chinese textiles, leading to fears that further trade conflict could hurt the U.S. currency. Many observers suspect the administration, despite its reiteration that it has a strong dollar policy, doesn’t mind the dollar’s fall since it could help U.S. exporters.
Economists are divided over the effect of the large U.S. deficits. Some say that a fundamentally strong U.S. economy will continue to attract investors from overseas. Those investors have to buy dollars to get into U.S. stocks and bonds — driving up the currency and, in theory, offsetting the effect of the deficits.
They also see the euro’s rise more as a story of dollar weakness than newfound confidence in the joint currency, since the dollar has fallen recently against the Swiss franc and the pound, which hit a five-year high Friday against the dollar at $1.7240. In midday trading in New York, the pound was worth $1.7203.
But the euro’s rise has raised fears at home that it might undermine an economic recovery on the continent just as it gets going by making European goods more expensive abroad.