Euro Could Rally if New German Finance Minister Promotes Economic
Reforms
Euro Could Rally if New Finance Minister Pushes Reform (Repeat)
(Repeats story from March 12.)
New York, March 14 (Bloomberg) -- The euro could rise
against the dollar this week, economists and investors said, if
Germany's government shake-up spawns the change Europe's largest
economy needs to revive growth.
Economists said the replacement of Oskar Lafontaine with
Hans Eichel as finance minister can only be good for Germany,
where companies are furious with government tax proposals and
the outlook for growth is bleak. Lafontaine's resignation
Thursday sparked a euro rally of as much as 2.4 percent, and
Friday boosted the benchmark DAX stock index more than 5
percent.
''We've had a break'' said Stephen Gallagher, an economist
at Societe Generale who sees the euro rising to $1.10 this week,
from $1.0907 currently, and to $1.15 by mid-year and $1.20 by
year-end. ''Now we should start hearing about economic and
fiscal reform in Germany, and that will be the key to a stronger
euro.''
The single currency rose three days last week, though it
suffered its biggest one-day loss against the dollar Friday
amid mounting evidence the euro's cornerstone economies, France
and Germany, are failing and weighing down growth throughout the
region.
In other trading, the dollar fell 3 percent against the yen
last week as Japanese exporters stepped up repatriation to boost
their profits before the March 31 fiscal year-end. The dollar
Friday slipped to 118.79 yen from 119.18 Thursday.
The Right Touch
Analysts said the 57-year-old Eichel, leader of the state
of Hesse, has what it takes to turn the economy around -- or at
least a better chance to do so than Lafontaine.
''Eichel is just what the doctor ordered for Germany,''
said Allan Saunderson, chief analyst at SG Money Research
Company Ltd. in Frankfurt. ''Fairly plain, a safe pair of hands,
industry-friendly, knows the Bundesbank and the financial center
of Germany. He will help to calm the hysteria in the Bonn
scene.''
Eichel has his work cut out, as do the political leaders of
many of the other 11 nations participating in monetary union.
German and French consumer prices barely budged in February, and
Italy's economy shrank in the fourth quarter. German retail
sales also fell 2.6 percent in January from a year earlier.
''The fundamentals that kept people concerned about
comparative growth prospects in Europe versus the U.S. are still
very much in place,'' said James McGroarty, head of foreign
exchange at Orbitex Capital Strategies.
That slowdown has undermined the single currency, taking it
down more than 6 percent against the dollar since its Jan. 1
introduction. The euro touched its weakest level of $1.0783 on
March 5 after Germany said its economy shrank 0.4 percent in the
fourth quarter, the first contraction in three years.
''With the lessening of tension between the politicians and
the ECB, we're more bullish on the euro,'' said Stanley Cherny,
who helps manage $1 billion in bonds at Hartford Investment
Management Co. in Hartford, Connecticut. ''Lafontaine's
resignation will allow (financial officials) to focus on their
jobs without political distractions. Ultimately that will lead
to a stronger economy and currency.
''Eichel is more business-friendly,'' he added.
ECB Question Mark
Lafontaine's surprise resignation fueled speculation that,
without him badgering the European Central Bank to cut interest
rates and potentially having the opposite effect, the bank might
feel more free to lower rates.
Not so, said ECB President Wim Duisenberg. He told an
audience in Rome that euro interest rates are low enough to
promote growth and help fight unemployment, and that the ECB
won't react to short-term changes in Europe's economy.
Even though lower rates would reduce the return on euro
deposits, the ECB's reluctance to cut rates may be part of the
common currency's problem by obstructing growth.
''Duisenberg threw a wet towel on hopes the ECB would cut
rates, and that's hurting the euro,'' said Societe Generale's
Gallagher. ''They want to keep generating the impression they're
setting rates based on economic fundamentals and are
disregarding politics.''
''If we could get a European rate cut, the euro would
actually strengthen,'' he predicted. The ECB left its benchmark
refinancing rate unchanged at 3.0 percent at its March 4 council
meeting.
U.S., Japan
The U.S. economy, meantime, grew 6.1 percent in the final
quarter of last year. And even as the economy booms, inflation
remains modest. A report Friday showed producer prices fell a
more-than-expected 0.4 percent in February.
And in Japan, recession worsened in the last three months
of 1998. The economy shrank 0.8 percent in the fourth quarter
from the previous quarter and for all of 1998, it shrank 2.8
percent.
That economic weakness and the damage it did to corporate
earnings has indirectly produced a stronger yen as companies
bring home more overseas earnings to boost their books before
Japan's fiscal year closes at the end of the month.
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