EMU to aid dollar more than Iraq,
Yeltsin-analysts
10:17 a.m. Nov 23, 1998 Eastern
By Nicholas Kotch
LONDON, Nov 23 (Reuters) - Russian President
Boris Yeltsin's failing health and the rumbling Iraq
crisis are helping the dollar but neither is a long-term
factor underpinning the U.S. currency, analysts said
on Monday.
Instead, the perception that all is not well in
''Euroland'' -- market-speak for the 11 European
countries which will launch a common currency on
January 1, 1999 -- is emerging as a more significant
ally for the dollar, they said.
The U.S. currency has already reached its highest in
more than two months against the German mark and
the Swiss franc on Monday.
Traders said some investors - rattled by Middle East
tension and Yeltsin's latest hospitalisation with
pneumonia - are increasingly seduced by the dollar's
status as a safe haven.
But other experts examining the dollar's strength had
other explanations.
''Iraq and Yeltsin may have some bearing at the
margin,'' said Robin Marshall, chief economist at
Chase Investment Bank in London.
''But in the last five to 10 years the conclusion has
been that geo-political factors have not had very
durable or dramatic impacts on currencies.''
He put more emphasis on the growing sense in
markets that uncertainty among European
policy-makers about their economies is starting to
weigh on the euro currency six weeks before it is
formally launched.
''That is helping the dollar at least as much as
near-term political concerns about Yeltsin or the
Middle East,'' Marshall said.
Stephen Lewis, chief economist at Monument
Derivatives, agreed and said the prospect of Yeltsin's
demise and the threats of Anglo-American air strikes
against Iraq were not fundamental causes of the
dollar's strong outlook.
''I think the markets have accepted for the past
month or two that Yeltsin has not effectively been in
control of affairs in Moscow and that (Prime Minister
Yevgeny) Primakov is now the man in charge of
Russian policy.
''On Iraq, the general view is that the U.S. is not
going to zap Baghdad because to do so would be to
end the United Nations as an effective institution.
Signs of a slowdown in key European economies are
making a cut in core interest rates more likely,
markets believe. Expectation of such a move in early
1999 by the European Central Bank (ECB) has
added to the dollar's appeal for investors.
But analysts said a bigger question mark is whether
the ECB will manage to pursue a rigorously
independent monetary policy or whether it will
succumb to pressures from leading politicians, led by
Germany's ruling Social Democrats.
Statements by German Finance Minister Oskar
Lafontaine in recent weeks were perceived by many
in foreign exchange markets as unwelcome
encroachments into the Bundesbank's territory and a
harbinger of tension ahead between the German
government and the ECB.
Such concerns are helping to reverse earlier
predictions that the transition to the euro would be so
smooth that it could start life too strong against the
dollar for the liking of its 11 member governments.
''People were talking about a dollar/mark rate of
1.45 or 1.50 and whatever that translates to on
dollar/euro,'' Marshall said..
''Now we'll probably see a move back to 1.75 or
1.80 as these political uncertainties continue to dog
the euro.''
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