 |
|
 |
|
 |
|
 |
|||||||||||||||||||||
|
Part of the problem (maybe most of it) is that Washington still hasn't reacted clearly to the dollar's move. Treasury Secretary Paul O'Neill was on the wires on June 21 saying he would oppose new IMF funds for Brazil. This not only hurt sentiment toward Brazil, it implied a neglect of the dollar — even an acceptance of a weakening dollar trend, given the dollar weakness of recent days. Now, if the new dollar trend is a "weakening trend," that would be bad news for future inflation and capital flows to the U.S. And if the desired trend is a "strengthening trend" as was the case in the 1990s, that would be bad news in terms of deflation, bankruptcies, and pricing power. Washington has said it wants a "strong dollar," but it's not clear how that is defined. The euro has climbed to 105, and that might still be a "strong dollar" in the mind of U.S. manufacturers and those who think the dollar is 20% overvalued. So, Washington's favorite "strong dollar" phrase doesn't really clear up the issue of whether the dollar should weaken from its present level. So far, there is no evidence yet of capital avoiding the U.S., though one would expect capital flight if if the dollar were allowed to fall into a weakening trend. Also, we've already had two previous rounds of euro strength that haven't impacted us negatively. In December 2000, the euro jumped from 84 to 95 in six weeks. In August 2001, the euro jumped from 84 to 93 in ten weeks. This time, the euro has jumped from 87.5 to 97 in ten weeks, about the same range. In all three cases, the euro strength depended on the idea of stronger growth in Europe than in the U.S. But the U.S. growth rate will still be higher than Europe's in almost all scenarios, and euro strength will run out of steam now that the U.S. economic data is coming in much stronger than Europe's. The concern is still more on the deflation side than the inflation side. To an extent, the dollar "weakness" is actually yen and euro strength. This is showing up in lower-than-expected inflation in the U.S., Europe, and Japan. Since Japan is still struggling to break its deflation spiral, yen strength is particularly harmful to Japan. The dollar is still transitioning from its 1997-2001 strengthening trend to a stable trend that will be constructive for the economy and, eventually, for equity markets. A stable dollar trend would imply low inflation and less interest-rate volatility going forward. But to be fully confident in this view, we need Washington to clarify its dollar policy.
— Mr. Malpass is the Chief International Economist for Bear Stearns.
|
|
|
|
|||||||||||||||||
<% dim printurl
printurl = Request.ServerVariables("URL")%>
he
dollar has weakened further in terms of the euro, yen, and trade-weighted
dollar indices, although its value remains relatively stable in terms
of gold and commodity prices. But the fear of dollar weakness is
one of the primary factors contributing to equity market weakness.
