The euro took a battering from a financial crisis in Turkey in the past week, but its immediate future will likely be determined by Wall Street, experts said. The euro had suffered after Turkey abandoned its currency peg on Thursday, February 22, leaving the Turkish lira to dive by over 30 percent.
The effective devaluation caused concern for European banks, especially heavily-exposed German institutions, which had large loans outstanding to Turkey. Despite a slight pick up on Friday, the euro finished the week at $0.9103, down from $0.9168 the previous week.
The European currency enjoyed an end-of-week lift against the dollar when US stocks tumbled following a profit warning from US telecommunications giant Motorola, anlaysts said. And US stocks would be the guide for the euro in the next week, said National Bank of Australia chief economist Steve Hannah.
"It is more how equity market sentiment develops that is going to be the key driver to the exchange rate in the next few days," he said.
The technology-heavy Nasdaq had dropped about 20 percent since US interest rates were cut at the end of January, and speculation was now growing about another rate cut, Hannah said. Ironically, the single European currency had gained ground at the start of the week as the Turkish central bank bought euros in a vain attempt to stabilise the Turkish lira.
The Turkish crisis was triggered Monday when Prime Minister Bulent Ecevit had a row with President Ahmet Necdet Sezer over the government's attempts to fight corruption. The dispute further undermined confidence in the government and put pressure on the crawling exchange rate peg, which was dismantled on Thursday under pressure from a mass exodus of domestic currency.
In Istanbul, a foreign banker told AFP that the central bank had spent some $4.9 billion in three hours on Monday to prop up the Turkish currency, a cost it was unwilling to bear. Some traders were losing their early-year confidence that the euro would quickly rally to parity with the dollar. It has fallen 3.4 percent against the dollar since start of the year.
Analysts noted in particular that the euro had failed to hold on to gains made Wednesday after the German Ifo business climate index showed an unexpected rise, the first gain since May 2000. The Ifo index rose to 97.5 points in January from 96.8 points in December, surprising analysts who had been looking for a fall.
But the euro's fortunes could improve if US economic prospects darken, said a report by BNP Paribas, pointing in particular to risks for the dollar with the release on March 9 of US employment figures. —(AFP)
© Agence France Presse 2000
© 2001 Mena Report (www.menareport.com)
