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Weak euro blamed for sliding crown

As the United States rides high on a wave of massive economic growth, European countries have been forced to come to terms with diminishing values of their currencies against the US dollar. In Slovakia a stable but weak Slovak crown has been further hampered by its ties to the European Union's euro - its reference currency - itself a victim of the dollar's strength.
For crown-earning businesses and individuals in Slovakia with monetary ties to America, the situation is frustrating.
Only one year ago, one US dollar bought between 40 and 41 Slovak crowns. In March 2000, a dollar was worth just more than 43 crowns, a number which grew to between 44 and 45 just three months later. Presently, the US currency buys just over 50 Slovak crowns.


While many reasons support a strengthening of the crown, dealers say its tie to the euro will continue to hurt it against the US dollar.
photo: TASR

As the United States rides high on a wave of massive economic growth, European countries have been forced to come to terms with diminishing values of their currencies against the US dollar. In Slovakia a stable but weak Slovak crown has been further hampered by its ties to the European Union's euro - its reference currency - itself a victim of the dollar's strength.

For crown-earning businesses and individuals in Slovakia with monetary ties to America, the situation is frustrating.

Only one year ago, one US dollar bought between 40 and 41 Slovak crowns. In March 2000, a dollar was worth just more than 43 crowns, a number which grew to between 44 and 45 just three months later. Presently, the US currency buys just over 50 Slovak crowns.

The situation has created difficulties for companies such as the Slovak Parcel Service - the local branch of the United Parcel Service (UPS) - which do business in both currencies. SPS charges customers in crowns but must pay commission to its American headquarters in dollars.

"Our company is affected because our dealings between UPS corporate offices in the United States and Slovakia are done in US dollars, and the local branch must absorb the losses [from the weak Slovak crown]. Because we have fixed price lists, rates do not fluctuate and the customer is not affected," said Pavel Žarnovičan, marketing manager at Slovak Parcel Service.

Financial manager for SPS, Ivan Žembery, added that help for his business may soon be on the way, as the Slovak branch expected to receive assistance from its parent company within the next month.

"UPS as our partner is ready to cover our losses in this case, and we are currently figuring out how this will be done," Žembery said.

However, for many regional companies, the effect of exchange rates has been less dramatic. Peter Sekanina, a macro-economist at J&T Bank in Prague, said that the majority of trading partners for Slovak import and export companies were based in central Europe, with trading carried out in euros and the dollar exchange rate having little effect on business.

"Because Slovakia is more dependent on Europe for exports than on the US, the euro exchange rate is much more important than the dollar rate," Sekanina said, adding that companies most affected were those that used a lot of oil, as world prices were set in US dollars.

Individuals are also feeling the pinch of the dollar's strength. "I have to go home next summer for a wedding and I budgeted the amount of money I would have to have. With the crown falling, I've had to take on extra work to make up the difference," said John Stratton, a New York native working in Slovakia as an English teacher. "This is very annoying. I need about $1,000 [50,000 crowns] for a plane ticket and spending money back home. Two years ago, this was about 30,000 crowns and now its 50,000. And who knows what it will be in June."

Euro-tied troubles

Analysts agree that the main reason behind the dwindling of the Slovak crown compared to the US dollar is rooted in the crown's tie to the euro. As the euro rises and falls against the dollar, the crown follows suit.

Through the past few months, while the crown itself has been relatively stable, its relationship to the euro has been behind the Slovak currency's diminishing worth, said Tatra banka currency analyst Branislav Baričák.

"The weakness of the crown is nothing to fear. It's still within the range that it has been fluctuating against the euro for a couple of months. The difference between the Slovak crown and the dollar is much more of a result of dollar/euro movement," Baričák said.

Dušan Svitek, head of money market operations at state bank Slovenská sporitelňa, agreed that the crown itself was stable. One primary reason for the dollar/euro difference, Baričák explained, was the strength of the American economy compared to Europe's. Some investors see European structural reforms as lagging behind, he added, while the US provides more credible economic policies. "You can see the proof of this in many acquisitions and the transfer of capital from Europe to the US," Baričák said.

Baričák cited the example of Deutsche Post, the German post office firm which is currently looking to acquire another 29% of American transport company DHL on top of its present 25% share. The Japanese have also been preferring to invest domestically or in US companies rather than in Europe.

Little relief in sight

In the short term, the Slovak crown could be further hampered by a November 11 referendum on early elections, a source of concern for investors worried about political stability, said Svitek.

The referendum was declared by President Rudolf Schuster after opposition leaders drew enough signatures to present a petition. The latest political move is expected to leave some businessmen shying away from Slovakia as a place to invest, fearful of further political turbulence, and putting further pressure on the crown.

"Small political problems of stability because of the November referendum and any kind of political talks between the coalition and opposition parties lead to problems [with the crown]," said Svitek.

In the longer run, however, Svitek was more optimistic. "In the long term, there is a possibility for the Slovak crown to strengthen. We have good inflation numbers, which are below the forecasts of the Ministry of Finance. This can lead to an increase in exports, which would support the Slovak crown," he said.

Baričák agreed that the outlook for a the crown was positive, but felt the stagnant euro and ever-strengthening US dollar cancelled out any trend towards a stronger currency. "Our long-term view on the Slovak crown is that it will strengthen. This is generally based upon the privatisation projects planned and the subsequent foreign capital inflow. But when we take the outlooks of the dollar and euro into account, it doesn't look very promising for the crown because the only chance the euro has is if the American economy starts slowing significantly," he said.

"I see very little chance of the euro rebounding remarkably anytime soon."

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