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We bring the following discussion up as it is highly pertinent to the bottom line of many U.S. corporations. You no doubt have heard about the negative impact of the weak euro (relative to the dollar) on corporate earnings numbers released over the past several weeks. This double-edged sword swings in both directions, however. As world economies were emerging from the depths of the 1998 markets, the U.S. government was determined to maintain a strong dollar, which was considered necessary to stave off inflationary pressures within our system (that was before the Fed started its intervention cycle).
The dollar continues to maintain its strength, especially compared to the infant euro currency. The weakness in the euro places a bottom-line burden on U.S. corporations from two facets. First, goods sold in the 11 euro-zone countries are paid for in the local currency. When they are deposited back overseas and exchanged to the U.S. dollar, some of the value dissipates in the exchange rates. Second, a strong dollar makes U.S. products more expensive in these regions. As a result, the competitive edge is diminished and sales shrink.
As mentioned in our "Before The Bell Section" today, the European Central Bank (ECB) intervened in currency markets to buy euros in a unilateral move that immediately lifted the region's currency. It is only the second time the central bank has acted on behalf of the euro. The ECB, which decides monetary policy in the 11 euro-nations, last intervened on September 22, coordinating with the U.S. Federal Reserve, the Bank of Japan, and other central banks.
The euro immediately rallied on the news to 0.8797 euros to the dollar before giving up most of those gains and falling back to hover just above 0.87. The European currency first broke below potential support at 0.89 in late August and has drifted lower ever since.
When a central bank shows itself willing to intervene in currency markets and buy , money traders are less willing to sell that currency for fear of being caught empty-handed if demand for that currency suddenly emerges.