Business

A brilliant debut

World currency traders greet the euro with glee

JOHN SCHOFIELD January 18 1999
Business

A brilliant debut

World currency traders greet the euro with glee

JOHN SCHOFIELD January 18 1999

A brilliant debut

World currency traders greet the euro with glee

It was a quirky way to cap a crowning moment in European history. During a ceremony in Amsterdam marking the first day of trading in Europe’s new common currency, the euro, demonstrators slapped Dutch finance minister Gerrit Zalm with two pies in the face. Their complaint was that the poor have been hit even harder by the budget cuts to clear the way for monetary union. But the protest was a far cry from the mood on world markets. “Europhoria” was the way pundits described the early reaction from currency traders, who immediately pushed the euro more than two cents above its opening level of $1.16 (U.S.) “The start was certainly awesome,” says Tom Courchene, an economist at Queen’s University in Kingston, Ont. “There will be growing pains, but so far it’s astounding.”

Consumers in the 11 countries that have adopted the euro—dubbed “Euroland”—can use it for credit card transactions or cheques. But euro notes and coins—many of them made by Fort Saskatchewan, Alta.-based Westaim Corp.—will not hit the streets until 2002. Even so, boosters are already touting the euro as a match for the U.S. greenback.

Canadians are benefiting, too. The introduction of the euro, along with rising oil and natural gas prices, helped to push the Canadian dollar last week to a high of 66.19 cents (U.S.). Currency traders who have dumped Euroland’s local currencies for the euro are buying Canadian dollars to diversify their portfolios, says Barry Wainstein, head of global foreign exchange for the Bank of Nova Scotia. The loonie also rose on the flagging fortunes

of the U.S. dollar, which was dragged down by such developments as President Bill Clinton’s impeachment trial and the decision by several central banks to sell some of their U.S. dollar holdings in favour of the euro. The Canadian dollar ended the week at 66.09 cents (U.S.), an increase of almost two cents since Dec. 30.

A HELPING HAND FOR THE LOONIE

The euro’s introduction on world currency markets contributed to a decline in the value of the U.S. dollar. But it was good news in Canada, causing the loonie to surge.

The euro’s unveiling has reignited a debate among economists in this country about a North American common currency. Canada is far more dependent on the U.S. economy than any of the European Union countries are on one another, says Courchene. As that economic integration increases, he argues, the pressure for a common currency or a fixed exchange rate with the U.S. dollar will increase. By some estimates, more than half of Canadian manufacturers and exporters already price their goods in U.S. dollars, partly because of

the volatility of the exchange rate. “The bottom line,” says Courchene, “is we need greater exchange-rate stability.”

Critics argue that any monetary union would force Canada to sacrifice too much of its economic sovereignty. A fixed exchange rate, they say, would not only make Canada more vulnerable to currency speculators, but would eliminate the cushion the economy needs when conditions change dramatically. “Anyone who thinks there will be a North American currency is dreaming,” says John McCallum, the Royal Bank’s chief economist and a leading opponent. “I don’t think it would fly, and I don’t think it should be attempted.”

U.S. interest in a monetary union could mount if the euro threatens the dominance of

the U.S. dollar. But Wainstein says the EU still has huge hurdles to clear, such as improving labour mobility and harmonizing taxes. And conflicts between the European central bank and the continent’s left-leaning governments are a real possibility. By week’s end, that reality was taking hold on trading desks, and the euro closed Friday at $1.16 (U. S.). “It’s easy to get caught up in the euphoria,” says Wainstein. “But the real hard work lies ahead.”

JOHN SCHOFIELD