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Strategies & Market Trends : Currencies and the Global Capital Markets -- Ignore unavailable to you. Want to Upgrade?

To: Hawkmoon who wrote (2754)	12/28/2000 9:38:46 AM
From: Robert Douglas	Read Replies (2) \| Respond to of 3536

if the dollar reaches parity with the Euro, then what will be the impact on Europe's ability to maintain its trade surplus vis-a-vis the US? The euro never fell below $1 until a year ago, so I hardly think this is a monumental problem. The area covered by the euro will run a surplus equal to .5% of GDP in 2000. The prior two years it was a deficit of -.5% and -.6%. Will it inhibit European growth, or assist it? At this stage of the recovery in Europe, I believe it will assist it. It will keep inflation down, allowing lower interest rates and provide cheap capital for the expansion to continue. The potential for investment in capital is enormous in Europe. As I have said before, Europe is analogous to the US ten years ago, they are entering into a long-term expansion that will bring unemployment down. Conversely, if the US dollar is now weaker vis-a-vis the Euro at parity, do US exports to Europe become more attractive? Of course they do. This is the natural cycle. Growth in Europe will be greater than the US next year. It has been a long time since that has happened. The US will provide lots of the technology that Europe needs to fuel their expansion. The US is much less dependent on exports than imports for GDP growth while the reverse is the case for Europe. I disagree. Europe is not an export dependent region. Now ask yourself who wins in a USD vs Euro battle. I don't look at it as a win or lose situation unless you are talking about which currency appreciates. The level of a currency is a balancing mechanism. At times in the economic cycle, a low currency is beneficial, and at times the opposite is true. Europe was helped by a weak euro in the recent past, but now will benefit by a stronger one. The US has been helped by a strong dollar because it has allowed for strong consumer demand to be absorbed abroad and not swamp domestic output. This has let our expansion run much longer than it would have otherwise. Now the US is slowing and a reduction in net-exports is warranted.[Edit]i.e. a reduction in the deficit. As a slowing economy and lower interest rates naturally weakens a currency, the balancing mechanism works perfectly. I look for the dollar to sink to a cyclical level of about $1.1 per euro and longer range fall to $1.2-1.3 per euro.