“The Bush administration’s retreat from a long-standing “strong-dollar” policy sent the U.S. currency skidding nearly to its lowest level yet against the euro and set in motion forces that could drive Europe’s already-beleaguered economy closer to recession,” writes Christopher Rhoads in today’s Wall Street Journal.

“The 12 countries in the euro zone, whose collective economy is second only to that of the U.S., have muddled through the downturn of the past two years with help from a weak euro that boosted exports. But that economic prop has been rapidly disappearing. The euro’s newfound strength makes those exports more expensive for buyers abroad. It also makes profits European companies earn in dollar-based economies overseas worth relatively less when brought back to Europe.”

“Deepening troubles in Europe present more bad news for the world economy, which is facing pressures on several other fronts. There is slower-than-expected growth in the U.S., deflation in Japan and the economic impact of the SARS outbreak in Asia.”

” ‘There is now a very distinct risk of a Europe-wide recession this summer,’ said Robert Lind, European economist with ABN Amro in London. A stronger euro has arrived at ‘precisely the wrong time,’ he added. A recession is typically defined as two successive quarters of economic contraction.”

“The euro’s latest surge — the currency has risen 27% against the dollar in the past year — came after U.S. Treasury Secretary John Snow seemed to redefine the U.S. strong-dollar policy at a meeting of the Group of Eight major industrial countries over the weekend. Rather than intending the phrase — a staple of U.S. economic policy for years — to mean the U.S. wants a strong dollar versus other currencies, Mr. Snow said it meant a robust currency that people would want to use for commerce and couldn’t be easily counterfeited.”

“The apparent U.S. shift drove the euro as high as $1.1738 in intraday trading Monday — above its $1.1680 value when the currency was officially born on Jan. 1, 1999, though still a hair’s breadth below the level of $1.1750 on the first day the euro actually traded three days later. Profit-taking reduced some of the euro’s gains, and it was quoted late in New York Monday at $1.1663, up from $1.1574 on Friday. Around midday in Tokyo Tuesday, the euro was quoted at $1.1656.”

“The year is shaping up as the worst for the euro-zone economy since the recession a decade ago. After Eurostat, the European economic-statistics agency, reported last week that the economy didn’t grow at all in the first quarter, economists started ratcheting down growth forecasts for 2003 to 1% or lower.”