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To: Rarebird who wrote (43793)	10/25/1999 11:18:00 AM
From: Lucretius	Respond to of 116764

that may be a buy signal?

To: Rarebird who wrote (43793)	10/26/1999 12:57:00 AM
From: ahhaha	Read Replies (1) \| Respond to of 116764

Oncerning the views of economists in your article, I have a different view which is definitely contrary. Therefore, it has a lot of potential for money making if the ECB authority are not merely socialist stooges of a bygone era. The article says: The euro has already started to reverse the steep downtrend against the dollar seen in the first half of the year, which pushed it close to parity with the dollar in July. Economists see Europe's economic outlook continuing to improve, and a widely expected interest rate rise by the European Central Bank should increase the euro's appeal." This view is based on the capital flows theory of currency strength. It is unwise for ECB to attempt to retain dollar parity through interest rate monetary policy. Certainly European bond markets will move in tandem with our's, but the ECB should supply reserves and keep the interbank rate from rising rather than subtract reserves and help it up. This is fiat monetary policy in contrast to interest rate monetary policy. Admittedly the EU is a demand regime so the string is somewhat stiff, but they have latitude for fiat policy and it is that policy, not interest rate manipulation per se, that would strengthen the Euro. It's bad to engage in this kind of intervention action, but the dog, the FED, is doing it, and therefore the tail must be wagged. The ECB is forced to follow because failure to do so means return to recession. A rate increase embraced by European monetary authority hurts EU output more than the commensurate rise hurts US domestic output. The EU is far more sensitive to exports and so they must stimulate output, not discourage it. The FED is not raising rates, they are fighting the market's attempt to do so by providing excess reserves at the margin. The ECB must do the same even though there is a theoretical inflation threat in the effort. The EU has not developed sufficiently to seriously engage an inflation threat. The greater threat is a fall back into recession. This is the flip side of the situation in the US, but the FED thinks not, and so the ECB must follow suit. Other dollar-bearish factors are also at play. The dollar is vulnerable to declines on Wall Street, where stock and bond markets have come under pressure from concerns that strong U.S. growth may fuel inflation and provoke higher interest rates. A confused statement. The dollar is not hostage to the stock market. A hair on the tail of the dog does not wag the dog. The stock market is currently hostage to the dollar, rather, hostage to the cause that is effecting both. Consider, they talk above as though rate increases are good for currencies, but here inflation caused interest rate increases is considered not good and it is not good through some screwball mechanism that rates cause the stock market to fall and stock market falling pulls down the dollar. This is completely disordered. Inflation causes the dollar to fall. Inflation causes interest rates to rise. Inflation causes the stock market to fall. Although the stock market is hostage to the dollar mostly due to perceptions of valuation, there is no necessary connection between movements of the dollar and the stock market and that is also true between the dollar and interest rates. Yes, even between stock market and interest rates. The stock market has often gone higher with higher interest rates. Whether this occurs or not depends upon perceptions of degree and whether any degree has the power to inhibit corporate profitability. America's international trade deficit is widely seen as unsustainable, as improving global economies vie with U.S. assets for investments. The trade deficit has been with us since 1969. They were saying the unsustainable stuff in the '70s. Global economies do not vie for investment assets. Asset accumulation is a consequence of competition to sell output. Global economies compete to sell output. "We're looking for more dollar weakness, and the story is a combination of heavy current account financing needs and larger increases in foreign yields than U.S. yields," said Jim O'Sullivan, economist at J.P. Morgan. Really? Current account deficits sometimes effect the dollar and sometimes they don't. It depends on circumstances which don't currently exist. The same is true for the capital flows argument which is similar to a claim in the stock market that money flow into a stock causes it to rise. Not necessarily, and often the influx causes price to fall! It depends on the elastic states and the total supply/demand regimes. Last year a load of capital flew out of the yen into the dollar. This was the last gasp move which formed the demarcation of the KT boundary between intrinsic deflation and intrinsic inflation. The dollar briefly jumped up and then stabilized back before making a last gasp upside rebound exhaustion move to a peak this year. The dollar is simply saying the US is now entering into an inflationary period. The current account deficit has come from the US preference for foreign goods. Foreign goods will rise in price, so there should be some shift back to domestic demand. The cost to furnish this demand is higher because the US labor cost is higher. So FED shouldn't be stimulating at the margin. "We think the Fed has more tightening to do but we expect even more tightening in most other industrial countries, including Europe and Canada." he added. No doubt but the FED is behind the eight ball, not in front of it. FED won't and isn't going to catch up with the market just yet. That is they won't raise the discount rate and they will keep providing extra reserves when rates creep above target until at least February. There is no way they would raise rates now. Their failure to do so will reverse the down trend in the stock market and the dollar should stop falling for awhile except against the yen.