Slower U.S. economic growth to take toll on greenback<\/p>\n
LONDON (Reuters): Slower growth in the U.S. and recovering
\nEuropean economies will take the steam out of a two-year uptrend
\nin the dollar next year, currency analysts say.<\/p>\n
The weakness of the Japanese economy and the negative impact
\nof Southeast Asian currency devaluations will allow the dollar to
\nnotch up more gains against the yen. However, in the second half
\nanalysts expect the yen to recover as Japan comes out of the
\ndoldrums.<\/p>\n
Expectations that the German economic recovery will gather
\nmomentum, meanwhile, will prop up the mark.<\/p>\n
"Overall, it will be a year of recovering economies in Europe
\nand Japan and slower growth in the U.S., which is a reversal of
\nthe dynamics that we have seen in the past two years," said Don
\nSmith, international economist at HSBC Markets.<\/p>\n
Over much of the past two years the dollar benefited from U.S.
\nand German interest rate differentials moving heavily in favor of
\nthe U.S. as the economy there enjoyed strong growth and low
\ninflation.<\/p>\n
Last summer that process started to reverse as markets
\nreassessed their views about economic recovery in Europe, and in
\nGermany in particular.<\/p>\n
Many forecasters predict the dollar has already peaked after
\nhitting highs just below 1.90 marks this year. A Reuters December
\nFX poll predicts a decline to 1.7000 towards the end of 1998 on
\naverage, with the most bearish forecast at 1.5700 and the most
\nbullish at 1.94.<\/p>\n
Some have stuck their necks out with forecasts for a yen
\ndecline as low as 145. The average forecast in the Reuters poll
\nis 121 by year-end, with 105 the highest yen forecast.<\/p>\n
Yen weakness is expected to be limited to 135 yen by many
\ntraders, due to fear of central bank intervention as policy
\nmakers want to avoid excessive yen weakness. A further gradual
\nweakening is unlikely to meet much official resistance since a
\nstronger yen would deal a savage blow to Japanese recovery
\nattempts.<\/p>\n
"The authorities (would) rather have an export-led recovery in
\nJapan than no recovery at all," said Chris Furness, senior market
\nstrategist at 4CAST.<\/p>\n
On Dec. 17, the Bank of Japan put steel into its efforts to
\nstem excessive yen weakness by selling dollars for yen for the
\nfirst time since 1992. The intervention came after Japan
\nannounced a surprise cut in personal income taxes in a bid to
\nspur economic recovery.<\/p>\n
Exports<\/p>\n
In the U.S., growth will be tempered by the negative impact of
\nthe strong dollar on exports. It typically takes about two years
\nfor the full impact of currency strength to be felt.<\/p>\n
Since 1995, the dollar has risen from a record low of 1.3430
\nmarks to a near-eight year high of 1.8913 at the end of October
\nand from 79.70 yen in April 1995 to a 5-1\/2 year high at 130.81
\nthis December.<\/p>\n
U.S. growth is expected to slow from a fiery expected rate of
\n3.8 percent to around 2.5 percent in 1998.<\/p>\n
The recovery process in Europe might be slow as widescale
\ncontinues to weigh on domestic demand, in particular in Germany
\nand France.<\/p>\n
But in the developed world, Europe is the region least
\naffected by financial turmoil in Asia, and this expected to
\nbenefit the mark and European currencies linked to it.<\/p>\n
About 9 percent of exports from the European Union go to Asia,
\naccording to OECD data. The U.S. has a much larger share with
\nsome 30 percent to the region.<\/p>\n
However, part of the negative impact on growth is likely to be
\noffset by strong U.S. domestic demand, and on the positive side,
\nit might reduce inflationary pressures.<\/p>\n
"The European economies are the least affected by the fall-out
\nfrom Asia," said Keith Edmonds, chief analyst at IBJ
\nInternational. "As a result we expect the mark to be bid, in
\nparticular if the Bundesbank decides to nudge up rates again."<\/p>\n
The latest Merrill Lynch quarterly global investor survey
\nsupports the positive mark view. It showed funds raised their
\nexposure to overweight in November from underweight in the
\nprevious quarter.<\/p>\n
The global rate outlook depends heavily on whether the
\nsituation in Asia stabilizes and also -- in the U.S -- whether
\njobs growth slows down, analysts said.<\/p>\n
A tight labor market means the Federal Reserve keeps a close
\nwatch for signs of emerging price pressures.<\/p>\n
The Fed has kept rates on hold since March, when it raised the
\nkey federal funds rate by a quarter point to 5.5 percent. The
\nBundesbank raised its repo rate to 3.30 percent from 3.00 percent
\nin October.<\/p>\n
One of the event risks on the list is the repatriation of
\nfunds by Japanese investors towards the end of the first quarter
\nwhen their fiscal year ends, which typically boosts the yen.<\/p>\n
German election<\/p>\n
The key political event will be the German federal election in
\nSeptember 1998. So far it has failed to excite forex traders even
\nthough support for veteran Chancellor Helmut Kohl is waning.
\nAnalysts don't expect significant changes to economic policy if
\nthe opposition Social Democrats (SDP) wins.<\/p>\n
In recent polls the SDP have sometimes been neck and neck and
\nsometimes slightly ahead of the Christian Democrats (CDU).<\/p>\n
In regional German state elections, Lower Saxony will be first
\noff the mark in March. Since their Premier Gerhard Schroeder is
\ntipped to run against Kohl next year the pundits will be out in
\nforce.<\/p>\n
Schroeder has called for a delay to European economic and
\nmonetary union (EMU), but the SPD does not seem to want to make
\nthe euro a campaign issue.<\/p>\n
A timely and broad start to European economic and monetary
\nunion (EMU) with 11 founding members is almost a done deal for
\nthe markets.<\/p>\n
The assumption that a broad EMU automatically means a soft
\neuro is already being reassessed, analysts said.<\/p>\n
Inflation in the euro-zone will be monitored with eagle eyes
\nby the independent European Central Bank, while its fiscal policy
\nwill be constrained by the stability pact.<\/p>\n
Also, Europe runs a significant current account surplus, while
\nthe U.S. runs a deficit that is expected to widen in 1998.<\/p>\n
The growing gap is a result of strong U.S. demand and the
\ncombined effect of weaker domestic demand in Asia and Latin
\nAmerica and greater competitiveness in Asia due to the
\ndevaluations of many currencies in the region.<\/p>",
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