France and the Netherlands' rejection of the European Union (EU) constitution is likely to speed up the retreat of the euro against the US dollar.  

The single European currency witnessed a three-day decline from May 30 to June 1, its biggest drop since 2003.

The euro now hovers around US$1.22, but is still well above its launch value against the US dollar about six years ago -- US$1.17.

Though the EU constitution focuses on institutional reform and decision-making procedures, demands for the single currency are waned as concerns over the treaty's failure may slow the economic integration in the region.

Concerns have also grown over the structural reform in EU countries, and market speculation has focused on a possible breakup of the monetary union.

Just after the Dutch voters said "no" to the treaty on June 1, Italian Labor Minister Roberto Maron proposed his country holds a referendum on whether to bring back lira, the old currency before Italy adopted the euro. Meanwhile, in Germany, some reports also discussed whether the euro shall be abandoned.

Although the remarks do not represent governments' policy, they underline the risks facing the euro and undermine investor confidence in the single currency.

As a result, the euro weakened against 15 major currencies. The euro fell 2.8 percent against the dollar last week while it slid 3 percent to 131.76 yen, the largest weekly drop against Japan's currency in almost a year.

"The amount of 'no' votes in the French and Dutch referendums highlighted the fundamental and economic problems in Europe," said Brian Taylor, chief currency trader at Manufacturers & Traders Trust in New York.

Concerns over faltering European integration may push the euro down to US$1.19 in a month, he said.

Meanwhile, lots of leading financial institutions, including ABN Amro, Lehman Brothers, Goldman Sachs and Merrill Lynch, raised their forecasts for the dollar against the euro last week.

The reason for unveiling the new forecast is not only the refusal to the EU treaty but also the dim prospect for euro-zone economy.

The US currency is up 10.8 percent against the euro this year as US growth exceeds Europe and the US Federal Reserve (Fed) indicates it will keep raising interest rates. Washington last week said its economy grew at an annual pace of 3.6 percent in the first quarter, and Fed lifted its target rate by a quarter-point to 3 percent on May 3.

Also last week, the European Central Bank cut its 2005 growth forecast for euro-zone to between 1.1 and 1.7 percent from 1.2 and 2 percent.

Analysts said the rate difference between the two leading currencies can also partly explain their reverse since this year.

Euro-zone finance ministers on Monday held their first meeting after France and the Netherlands' refusal to the treaty and tried to boost support for the single currency.

However, some analysts said the euro-zone leaders would be happy to see the euro fall since the weaker currency would help boost the region's much-needed exports.

"The euro's decline will help claw back lost competitiveness," said Anais Faraj, an economist at Nomura, a leading Japanese banking group.

"On our reckoning the trade-weighted currency's 5 percent slide so far this year equates to 30 basis points of interest rate cuts," he said.

In this case, without the strong support from the political and economic sides, the fall of euro is likely to go on until the euro-zone economy gets a full boost.

(Xinhua News Agency June 8, 2005)