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

To: Michael who wrote (15)	5/1/1998 4:50:00 PM
From: Henry Volquardsen	Read Replies (1) \| Respond to of 3536

Michael, Welcome aboard. Without trying to sound like a two handed economist, I believe both schools of thought will be correct it just a matter of in what order events roll out. In the near term I believe the first scenario will hold sway. The Euro is likely to strengthen for a couple of purely technical reasons. Mainly due to central bank reserve adjustments. Also longer term structural players seem to be intent on shifting some assets to the Euro. Also you are right that the EU wants to promote a strong Euro in order to dent the dollar's prominence. So I believe we will see a strong Euro at the start. Over the longer term the fundamentals of the Euro block are weaker than the dollar. They are running larger budget deficits and have a higher debt to GDP ratio. Their economies also need more structural reform (some of which they are getting) and have weaker growth prospects. The success with which they address these issues will determine whether if down the road the weaker fundamentals assert themselves. A couple of other points. I have heard a number of gold bulls trying to spread the idea that the Euro will have as much as 30% gold backing. Nothing could be further from the truth. This is a misreading of what has been said. 30% of reserves will be held in gold. And the reserves behind the Euro and held by the ECB will be @20% of the reserves currently held in support of the currencies that will merge into the Euro. Also for those with a sense of humour it is worth taking a look at the position the French have gotten themselves into vis a vis the strength of the Euro. Of all the Europeans the French are the most annoyed by the preeminence of the dollar and want a strong Euro to supplant the dollar just for ego reasons. French officials have been quietly going around Asia and elsewhere promoting the Euro as a stable, managed currency that won't be subject to the boom/bust volatility of 'Anglo Saxon Capitalism'. But their biggest concern is trade and job growth, and their favorite prescription for this has always been a weak currency. So on the one hand they want a strong Euro to screw the Anglo Saxons but on the other hand they would like a stable to soft Euro to promote growth. For a while they were twisting themselves in knots trying to figure a way to have their cake and eat it. They seemed to have decided they would rather screw us <GGG>. Some things never change. Henry