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Strategies & Market Trends : MDA - Market Direction Analysis -- Ignore unavailable to you. Want to Upgrade?

To: Haim R. Branisteanu who wrote (59392)	9/25/2000 6:45:16 PM
From: Saulamanca	Read Replies (2) \| Respond to of 99985

THE EURO'S DIFFICULT CHILDHOOD September 24, 2000 It wasn't supposed to be this way. When Europe's new currency--the euro--was first introduced to the world in January 1999, it was heralded as a much needed counterbalance to the U.S. dollar. There were heady predictions that soon it would give the dollar a run for its money as the reserve currency of choice, the safe haven for the nations of the world. That day may still come, of course. The euro, after all, is still a toddler and its coins and bills won't even appear until 2002. But in its nearly 21 months of life, the euro has run precisely nowhere. Instead, it has fallen 27 percent from its birth value of $1.17 to Wednesday's record low of 84.38 cents. That plunge finally became so worrisome for the world economy that Friday the U.S. joined in a coordinated move with Japan and Europe to sell dollars and other currencies to boost the euro's value. Despite widespread speculation about this very possibility, it still came as a surprise. Such a joint intervention is rare. It was probably necessary to send a signal to financial markets that have worked themselves into a speculative frenzy, but its effects may be only temporary. And it carries considerable risks for the U.S. because a weaker dollar has the potential to drive up inflation in advance of the presidential election. The slide in the euro, coupled with soaring oil prices, already is fueling ominous inflation in the 11 nations that make up the euro-zone. Furthermore, that stumbling currency faces a vote of confidence Thursday when Denmark decides whether to join the euro-zone. It, along with the United Kingdom, Sweden and Greece are the only European Union countries that haven't adopted the common currency. Polls indicate the Danes will reject the euro. What happened to the euro? The answer to that is not so much what has gone wrong in Europe, but what has gone incredibly right in America. Growth in Europe has been gaining strength, but growth in the U.S. has been on fire. That means higher returns on this side of the Atlantic, so investors of the world have been pouring money into the U.S. The higher growth rate in the U.S. comes from a combination of things--part culture, part serendipity, part the payoff of painful years of restructuring. Starting over in the U.S. has always been easier. Companies bloom, hire scads of people, go broke. People move on to other jobs, other cities, other careers. They take risks. The entrepreneurs try again. There's plenty of money here to finance this creative cycle and not many barriers to the movement of people. That hasn't been true in Europe. Movement of both labor and capital has been much more constrained by regulation and by culture. Companies have been reluctant to hire workers until they absolutely must because of the long-term economic commitment each worker entailed. That has meant higher unemployment in Europe. Generous social benefits also have eased the pain for the jobless and consequently given them less incentive to look for work. All of that is changing but it is a slow process. Plus, America has been lucky. Just about the time U.S. growth was in danger of igniting inflation here in the late `90s, the Asian financial crisis tossed the rest of the world into recession, providing a much needed release valve. And the payoff of the information technology boom in higher productivity--at precisely this moment in time--has allowed America to grow longer and faster without igniting inflation than would have been the case just five years ago. The euro will strengthen when the markets are persuaded that Europe's growth potential can catch up with the U.S. If the U.S. slows, of course, it has less far to go, but that doesn't lessen the need for hard decisions on tax and labor policies. Why should Americans care if the euro is weak? When the euro is weak, the impact on the euro-zone's largest trading partner, the U.S., is cheap imports, costly exports. The combination of strong dollar/weak euro is fueling a soaring trade deficit and that, say economists, could be the Achilles heel for the U.S. economy. Remember, a strong dollar makes imports cheaper so Americans buy more. It also drives up the cost of our exports, so Europeans and others buy fewer of them. That's why the trade deficit is widening. We're buying more; they're buying less. In July, the trade deficit hit a record $31.9 billion. It's running at an annual rate of $353.7 billion--a third higher than last year and more than double the 1998 deficit. America is now running trade deficits with China, Japan, Western Europe and Canada. Most Americans are far more concerned about rising gas prices than they are about the trade deficit. But such an imbalance can't last forever. It will move toward balance--one way or another. Hope that the correction takes place slowly, because if something happened suddenly to make the U.S. less attractive as an investment haven--and all that foreign money poured out of the economy--the result could be shocking to an America that has come to assume these boom times are a birthright. chicagotribune.com