Wednesday, May 01, 2002

Surprisingly, the Euro Rallies, Raising Hopes of Further Gains "Is the euro turning? That is a question that currency analysts have been asking since the new currency was introduced in 1999. But if they have dared to say yes, they have been proven wrong." "So any rebound of the euro, which is up 4.7 percent since the end of January, is viewed with caution. Still, there are signs that the single currency of 12 European nations is on a steady upward tilt, a move that would be an important event for Americans who invest on the Continent. As the euro strengthens, return from stocks or bonds in Europe will increase when they are translated back into dollars." "The surest sign of strength for the euro is that the dollar is weak. The dollar is down so far this year against the Japanese yen, the Australian dollar and the Mexican peso. Since the end of January, when the dollar rallied against most of the world's currencies, the dollar has been falling against the British pound, the Swiss franc and the euro." "What is surprising about this euro rally is that it appears to be the result of a perception of weakness in the American economy and financial markets. This is surprising because the dollar managed to keep the upper hand against the world's currencies after the Sept. 11 terrorist attacks and even in the face of what was thought, at the time, to be a serious recession." " . . . the dollar's strength reflected positive expectations about long-term returns on investments in the United States — compared to the rest of the world — while the recent performance of the stock market is making investors question those expectations. . . . it did not take a big shift in the flows of foreign capital into the United States to push the dollar lower. That flow just has to slow down, and it will, if expectations about the American outlook change." " . . . wondering about what has happened to the argument that has kept the dollar strong and the euro weak: that the United States would outperform Europe both on economic growth and stock market returns." 2:07:17 PM  Google It!  comment  []

"A strong dollar is in the best interests of the United States, and the Bush administration won't change its policy on the subject anytime soon, Treasury Secretary Paul O'Neill told Congress on Wednesday." "The Bush administration's allegiance to a strong dollar follows the same commitment from the Clinton administration. Both maintained that the U.S. economy reaps enormous benefits from a strong dollar, which helps to hold down inflation, provides consumers with a wealth of product choices from all over the world and attracts the billions of dollars in foreign investment the country needs to offset its huge trade deficits." "O'Neill took issue with a recent warning by the International Monetary Fund that the country's huge trade deficits were one of the biggest risks facing economic recovery in the United States and the rest of the world." "'The overvalued dollar is ... perhaps the single most serious economic problem facing manufacturing in this country . . . It is decimating U.S. manufactured goods exports, artificially stimulating imports and putting hundreds of thousands of Americans out of work.''' "C. Fred Bergsten, who heads the Institute for International Economics, a Washington think tank, said that every 1 percent rise in the value of the dollar produces an increase of at least $10 billion in the current account trade deficit. He estimated that the dollar is overvalued by 20 percent to 25 percent." "The U.S. current account deficit, the broadest measure of trade, stood at $417.4 billion last year, near its all-time high of $444.7 billion set in 2000. If the dollar remains overvalued, Bergsten said, the deficit is likely to approach $500 billion this year and could hit $800 billion by 2006, an amount equal to 7 percent of the entire U.S. economy." "'It is time for the administration to change its policy toward the dollar ... to reduce the risk of the much more severe adjustment that will inevitably hammer us later if it continues to ignore the problem,' Bergsten said." 2:03:57 PM    comment  []