Europe winces at currency's rise

Europeans traveling to the United States in recent months have been returning with more than just their own luggage.

"I picked up three bath towels for a friend, and cosmetics, and cologne," says Herwig Schober, a Lufthansa flight attendant recently back from a trip to New York. The euro's dramatic rise against a weakening dollar meant he saved 15 euros by buying his cologne in America. Friends have begun to make gift requests.

But what's good for the European tourist is bad for business overall on the Continent. The currency's rapid rise in recent weeks (one euro is now worth $1.34) is worrying everyone from small-business owners to heads of state. Most of the 12 European countries that use the euro have slow economic growth rates. This raises the need for successful exports, which, due to the strong euro, are now more expensive abroad.

"What's making it probably harder to bear ... is that we are, in general, in a weak growth environment and exports have been the only engine of growth," says Manuela Preuschl, a senior economist at Deutsche Bank.

Europe's export-driven economies are already seeing the effect the euro's strength over the past year has had on the bottom line.

Electronics and automobile makers who are active in US markets or Asian countries which use the dollar have been especially hard hit.

Heinrich von Pierer, chief of electronics giant Siemens, said last month that his company's products have risen in price by about 30 percent.

Economists say that America's growing trade deficit and Washington's massive public spending is a major reason for the dollar's fall and the euro's subsequent rise. Many here are annoyed at the Bush administration's seeming lack of interest in strengthening the dollar.

President Bush said last month that the US is committed to a strong dollar and deficit reduction.

But Europe remains anxious. Euro-zone finance ministers issued a joint declaration last week criticizing the US for letting its budget deficit get so out of control. And Germany's Chancellor Gerhard Schröder called the euro's rise "worrying."

"It's difficult [for the US] to ask Europeans to implement structural reforms - which they are already doing - and at the same time not put a lot of focus on its own economic issues," Chancellor Schröder said.

But neither Europe's finance ministers nor the European Union's central bank can do much to halt the euro's rise, which European Central Bank (ECB) President Jean-Claude Trichet called the euro's rise "brutal and unwelcome."

"The ECB could intervene to stop the rise, but it won't happen," says Jerome Creel, a French economist at the Paris institute OFCE. "The bank is not so strong and not that credible."

Currency traders failed to cheer the US Federal Reserve's announcement Tuesday that it was raising interest rates a quarter point.

That increase in the fund rate, the fifth since June, was designed to temper inflation and boost the dollar slightly. Instead, the dollar fell and analysts say the euro will likely continue to rise.

A recent Deutsche Bank report forecast that the euro would rise to $1.40 over the next 12 months.

"For the time being we still have not reached the top," says Ms. Preuschl, the Deutsche Bank economist.

European travelers, of course, don't seem to mind this prospect one bit. Increasingly, they are heading across "the pond" to see just how far their money will go.

Neckermann Reisen, one of Germany's largest travel agencies, reported booking 10-20 percent more trips to the US in 2004 than in 2003.

"The dollar has just made it so much cheaper," says spokesman Rolf-Dieter Grass, whose company is offering European shoppers Christmas shopping trips to New York.

European Union passport holders are not the only ones benefiting from the current situation.

Kimberly Bradley left New York last year with a $7,000 credit card debt. Since the Berliner landed a job editing a magazine where she gets paid in euros earlier this year, she's been happily paying off a much smaller bill.

"The dollar can keep falling as far as I'm concerned," she says.

"I understand the bigger ramifications of this, and that if the euro is strong that it's bad for exports," she says. "But I don't really care about that right now."