Gabriella:
A simiar view:
IMF'S MUSSA: U.S. TRADE DEFICIT MAY WEAKEN DOLLAR
--Warns of 'Lofty' Stock Prices, Correction --Suggests D-Mark Undervalued --Says Japan
Needs To Extend Fiscal Stimulus Past '98
By Steven K. Beckner
WASHINGTON (MktNews) - The U.S. dollar could well rise further, particularly since
the Federal Reserve is apt to raise interest rates and may raise them a a lot, but then the dollar
could become vulnerable to a possibly sharp depreciation as the U.S. trade position
deteriorates, the International Monetary Fund's chief economist Michael Mussa said Monday.
Mussa, at a press conference in advance of the spring meetings of the IMF and World
Bank, also said a major correction in "lofty" U.S. stock prices may be in the offing but said he
does not expect it to have "large adverse consequences."
The IMF Economic Counselor and Director of Research indicated he regards the German
mark as undervalued and expects a firming of monetary policy in Germany and across Europe.
He said the yen may eventually strengthen, but only over the longer term.
Mussa had lukewarm praise for the new Japanese fiscal stimulus package, saying there is
"a reasonable hope" it will cause "some resumption of positive growth" but not until the second
half, and he warned that if Japan allows most of the fiscal stimulus to lapse after 1998, Japan's
economy could return to recession.
The blunt-spoken Mussa, who was commenting on the IMF's semi-annual World
Economic Outlook, outlined a sequence of events that could reverse the dollar's strong course
over the next year. Indeed, given the IMF's forecast that the U.S. current account deficit will
widen to $230 billion or 2.75% of GDP this year, he said the dollar already "might plausibly
be weaker than it is at present."
Instead, Mussa said the dollar could strengthen further in response to a likely rise in U.S.
interest rates. "Underlying inflation pressures are picking up," he said, adding that "the
buoyancy of asset prices evident in the stock market ... in recent months has been spreading to
the real estate market as well."
Therefore, Mussa continued, "the Federal Reserve may need to make monetary conditions
further," leading to a further rise in the dollar, which in turn would cause a "further weakening
of the U.S. current account position." Then, if the U.S. economy weakens the dollar could
start falling, he said.
"This is a scenario, not a forecast," Mussa said, adding, "it warrants some concern at this
time." He envisioned two possible scenarios, one in which the dollar falls "gradually" after a
further rise, and another in which it could "weaken all at once."
Mussa said he now has "no reason to anticipate a severe tightening" of U.S. monetary
policy, but added, "it's something we worry about over 6 to 9 months."
He also expressed concern about the level of stock prices, particularly in the United States,
but also in other markets. Noting that price-earnings ratios and dividend-yield ratios are "at or
very near their historical peak," he said it is "very difficult to sustain these levels are over a
longer period of time."
Stock prices are "getting to relatively lofty heights," Mussa went on, ruminating about the
possibility of a "20 percent correction." In that event, he said, the impact on the U.S. economy
would be "mild." He said "there does not appear to be a large reason to fear that the market
would go from 8000 to 4000."
"While there needs to be concern about the possibility of an equity correction in the U.S."
and elsewhere, Mussa added, "I don't think there is a reason to fear that there would be large
adverse consequences." For one thing, he said the Fed would "have a great deal of latitude" to
counter any recessionary threat stemming for a correction. What's more, he said, "we've seen
no big run-up in real estate values at this stage," and the financial system is not as tied to the
stock market as was Japan's.
Japan, like Asia as a whole, remains vulnerable to "downside risks," Mussa said, indicating
he regards that nation's recently announced $75 billion fiscal stimulus plan as too limited and
short-sighted.
Mussa noted that the IMF's WEO forecast is for "zero growth" in 1998 and said that, as
things now appear, even zero "will be hard to materialize." He added "there is some
reasonable hope we'll see at least some resumption of positive growth in the second half, but
at the present time it looks weak."
Mussa said the mix of temporary tax cuts and spending increases should add 1.5% of GDP
to domestic demand, but stressed, "to sustain the momentum it is necessary to extend the
stimulus beyond this year until you're sure (recovery ) is self sustaining ... . If you put in 2% of
fiscal stimulus this year and take out 2% fiscal stimulus next year, you may just resume the
problem, unless there's a strong reason to believe the Japanese economy will recover on its
own."
Mussa said Japan "could get some help" from an Asian recovery, but said that remains in
doubt and said "it would be unwise to plan on a withdrawal of fiscal support as early as 1999."
Mussa said "the yen might strengthen" over the next three to four years, but suggested that
it will remain weak in the meantime. "The balance of risk is on the downside for Japan," he
said.
For the European economies and currencies, Mussa and his deputy Flemming Larsen had
a very different outlook. With signs of strengthening expansion in Germany and Europe
generally, and with European Monetary Union apt to go ahead on schedule next January 1,
Mussa said there is "somewhat less reason for weakness of the market against the dollar."
Indeed, given the probability of stronger growth in Europe and slower growth in the United
States, cyclical conditions "suggest we should see a somewhat strong mark; instead we see a
weaker mark." Larsen said he expects a firming of monetary conditions over time, but said he
does "not see a great rush" for monetary tightening in Europe. He also forecast a strengthening
of European currencies and a "tendency for the euro to firm" once it comes into being January
1, 1999.
"Later this year it will probably be necessary" for the Bundsbank to raise interest rates,
Mussa said, although he said "it's possible we won't each that point." He said it's also possible
a faster tightening will be needed. for the time being, he said it is "appropriate" for German
monetary policy to stay on hold.
While risks in Asia and Japan remain "on the downside," risks are "on the upside" for
Europe. He said a big risk for the world economy is "how much will the Fed have to tighten."
** Market News Service Washington Bureau: (202) 371-2121 **
[TOPICS: MNSFED,MNSEMU]
11:43 EDT 0
Sorry for the formatting don't know how to make it better |
