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The rise of the euro

The days of the weak euro seem to be over. The euro has bounced back from the nadir of $0.88 to $0.96 now. But it's still way below the level of $1.17, when it was launched nearly 18 months ago. At the time of its launch, I forecast that the euro would slump to 1:1 against the dollar. When it reached that level, I expected it to turn round and head back up. But that prediction has been confounded so far.

Up to now, the euro's recovery has been undermined by relatively weak European growth compared to the US; a big deficit on interest rates between Europe and the US; and huge capital flows into the US from Europe.

Over the last couple of years, euroland has run a $140 billion annual basic balance of payments deficit and Germany alone has accounted for almost 60% of that. The net outflow of long-term capital (much of it associated with investment in the US corporate sector) was worth between 2-3% of GDP. No wonder the euro had a difficult birth.

Of course, these capital outflows are themselves a reflection of deeper underlying concerns.

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