Hi Robert! Good to see you back!
Here's a Euro take from ft.com, 1/4/00
Undervalued euro looks to higher ground
By Tony Major in Frankfurt
The euro celebrates its first year of trading dangling tantalisingly above the one-for-one level against the dollar.
It has fallen more than 14 per cent in value against the US currency over the last 12 months, boosting end-of-year growth in the euro-zone and stoking fears of inflation.
Concerned at the euro's weakness but reluctant to intervene in the markets, the European Central Bank has offered "verbal support" to the struggling currency. ECB board members say the currency's strengths are being underestimated by foreign exchange markets.
It was briefly boosted yesterday after Wim Duisenberg ECB president, said the euro's downward trend is over and the currency has room to appreciate. His comments followed those of Christian Noyer, ECB vice-president, last week.
"I have no doubt about it," said Mr Noyer. Experience proves that a currency, in the longer term, will reflect its fundamental value against other currencies. He believed this would be the case with the euro as price stability and economic growth became clearer in the euro-zone.
The ECB council will meet for the first time in the new year tomorrow with all the signs pointing to a strong start to the new millennium for the euro-zone. Strong exports, buoyant domestic demand and the benefits of structural reforms - the deregulation of services and capital markets and widespread privatisation - should propel growth to well above the trend this year.
Merrill Lynch, the US investment bank, is forecasting growth of between 2.8 and 3 per cent as euro-zone producers make the most of their super-competitive currency and boost their share of the global market. The Munich-based Ifo economics institute has already forecast euro-zone GDP growth of 2.9 per cent this year on the back of strong economic recovery in Germany.
Merrill Lynch and Ifo are also optimistic about the inflation outlook. Headline inflation is expected to accelerate to about 1.8 per cent early this year, a result of dearer oil and weak euro.
But for the year as a whole the rate of inflation should moderate to 1.3 to 1.4 per cent, still well below the 2 per cent the ECB defines as price stability.
In response to strong economic growth and the temporary spike in inflation, most analysts expect the ECB to raise interest rates in the first few months of this year - probably in February or March rather than at its first meeting of the year.
The ECB last raised its key refinancing rate in November, by half a percentage point to 3 per cent. Last week's M3 money supply figures, showing a faster-than-expected growth rate, have already signalled higher rates might be needed in the first quarter to combat inflationary pressures.
Two scenarios now seem possible. If the euro rebounds on its own to about $1.06 in the early part of this year, economic growth and inflation are likely to remain below the levels that could trigger an aggressive ECB response. Analysts would, therefore, expect a 0.25 percentage point increase in euro-zone rates in March.
However, if the euro stays weak and again tests levels below one dollar, analysts say the ECB would respond aggressively to the perceived inflation risks and raise rates 0.5 percentage points, probably in February, and then again later in the year.
Whatever the outcome, after a weak start to the year, the euro is widely expected to rebound, recovering to $1.08 to $1.12 by the end of 2000 as the euro-zone economy strengthens and US economy starts to slow.
Regards,
Nancy |
