Most analysts argue that the European Central Bank should not be worried about parity between the euro and the dollar. And as ECB president Mr Wim Duisenberg has been at pains to point out, there is no need for concern on economic grounds.
Logically parity is no worse a rate than $1.10, nor is a weakening currency the same thing as a soft currency. In fact the weakness of the euro has been a boon to the euro zone during 1999 and is the factor most behind the pick-up in growth seen in both France and Germany.
The softer currency and a stabilising position in the Far East have been great for exporters across the euro zone from Germany to the Republic and Finland. At the same time improving employment prospects have boosted consumer confidence across most economies.
As a result of improving confidence, by late summer the risk of parity with the dollar was seen to have been avoided. But as soon as interest rates were raised again, fears came flooding back and this time around, parity was actually tested.
This is despite the fact that inflation pressures across the bloc are modest and rising consumer prices are only a reflection of higher oil prices. There is some threat from wage settlements, but probably not as much as the ECB would like to pretend. The Dutch trade union federation has increased its pay recommendation from 3 per cent to 4 per cent, but this is unlikely to be affected by a few cents either way on the euro.
Nevertheless, concern persists about the new currency's performance. As Mr Duisenberg pointed out, this is founded in the potential concern of voters and consumers. Many people across the euro zone believe that a falling euro is a weak euro which could eventually undermine the value of their savings. Even the ECB's chief economist Mr Otmar Issing's mother has been calling him to ask what he is doing with the currency.
In addition, according to Ms Alison Cottrell, chief international economist at Paine Webber, the popular legitimacy of the currency is one of Mr Duisenberg's abiding concerns. The ECB, she says, is always conscious of the bigger picture. It is urging a moderate pay round in 2000 - a move that has less to do with fears that high settlements would result in surging inflation and more to do with the fear that they would jeopardise growth and employment and hence, ultimately, damage the euro's legitimacy.
The main problem for the euro to date is that European growth failed to live up to expectations in the early part of the year while the US performed better than expected. As a result the euro's decline was at odds with what was expected but consistent with what actually did happen.
Present euro levels are probably not inappropriate for the overall economy and do not pose an inflation risk. But there is a rub. There is a chance that the combination of higher oil prices and a lower euro could creep back into the inflation forecast. The forecast is still for inflation to peak well below 2 per cent before declining again, but the risk is certainly on the upside. Many analysts now expect interest rates to be raised in the first three months of the new year. And according to Medley Global Advisers in New York, some ECB council members are talking hawkishly enough to make it quite possible that the first rise will be quite early in 2000.
According to Medley, the ECB does not believe this will impede growth but rather will ensure there is room to cut interest rates when the cycle peters out.
The other possibility, according to Mr Allen Saunderson, director at the Frankfurt Money Strategist, is that if the US Federal Reserve continues to tighten rates through 2000 to slow down US growth, the ECB may be tugged along to avoid a further euro fall which could exaggerate the electorate's worries. This, he says, may bring forward the next European interest rate increase to March or April next year.
Intervening in the currency markets is a time honoured way of boosting a currency's value. But there is some division over the potential impact of intervention by the ECB. It is likely that any intervention would be quickly offset or would be proved unnecessary. It may be better to treat the actual problems rather than merely alleviate the symptoms. And as Ms Cottrell said, the highlighting by Mr Duisenberg of public opinion is probably a mistake.
"Unless the ECB intends to adapt public opinion as a third pillar of policy making alongside money supply and inflation, such remarks serve only to demonstrate that in the absence of clarity too much transparency can be as discomforting as too little," she said.
But it is also possible to intervene by stealth. This usually involves some tactical intervention by carefully timing the ongoing dollar reserve management by national central banks. It is even possible that this could have been at least part of the reason for the announcement of the Hong Kong Monetary Policy authority that it is buying more euros.
Others point to the current account imbalances between the EU and the US as ultimately being euro supportive. It is true that the euro zone's current account surplus and the US current account deficit, all other things being equal, should be euro supportive. However, all else is not equal. And for the first time in some years the currency markets have been looking closely at individual deals in the equity markets.
Overall, according to some in Britain and the US, it seems that more money is flowing out of the euro zone to buy dollars and yen than the governments want to allow back in. Deals involving Mannesmann, Holzmann, Orangina and so on underline the old corporate culture in the euro zone and underline the lack of structural reforms. The German Chancellor's rescue of Holzmann and his interference in the Vodafone-Mannesmann bid is proving very popular domestically, and just in time for his party conference this week. Of course Mr Schroder also has his eyes on crucial state elections in February and May. It is probably no coincidence that the many employees in both companies live in North Rhine Westphalia whose election is due on May 14th. And as Medley points out, whatever the ECB and the Financial Times think of you, having 80,000 construction workers believing that you saved their jobs is not a bad thing for an SPD politician.
It now seems more possible that Mr Schroder's prospects will improve. That would mean a more confident Germany, a better growth climate and stronger internal economic dynamics leading to a stronger euro.
Normally the failed bid for Orangina would have gone unnoticed but now that too is being taken as proof that the French conversion from socialism is less robust than many thought. According to Ms Cottrell these are the "last squeals" of the old era and it is only the politicians who are dragging their feet.
Importantly, the weak euro also makes all euro zone businesses very cheap take-over targets for outside suitors. This also holds true of this State. And if a British bank was considering a take-over of one of the Irish banks it would be far cheaper to do it now than when the euro may have rebounded a good deal.
Efforts to agree a withholding tax at EU level are also weighing on the currency.
Nevertheless, according to Ms Cottrell, once the dangers over the rest of this year are taken into account the euro should begin to recover. As the growth gap closes in Europe's favour and the German wage round swings into action in February, the ECB should growl more fiercely which will boost confidence.
Growth, inflation and interest rate expectations all point to fundamental euro support once the millennium changeover is out of the way. As a result, Ms Cottrell is expecting the currency to be $1.06 at the end of March, $1.10 at the end of June and $1.15 a year from now.
