Monday, August 20, 2001
Investor expectations for U.S. growth prospects are souring and the change is being reflected primarily in the foreign exchange markets. The dollar has been drifting downward against the euro since mid-July. Even the yen has been rising, when certainly the outlook for the United States is much better than for Japan. Something snapped the week before last when the Beige Book painted a gloomy picture of the economy's current and future conditions, giving the euro momentum despite less than favorable news from EMU countries. Speculation that the Bush administration actually wants a weaker dollar hasn't helped, and neither has traditionally thin summer trading.
The annual IMF report warned that the dollar is heading for a fall and that the U.S. economy may face a protracted slowdown. The IMF pointed to, among other things, the tax refund (saying that it probably will cost double what the administration has estimated) and the swelling merchandise trade deficit. The merchandise trade deficit reported last week showed a widening gap with both exports and imports falling. Investors increasingly are concerned that U.S. growth continues to cool despite the Fed's aggressive easing. The trade gap raised speculation that foreigners may trim their investments in U.S. financial assets and put downward pressure on the dollar. Investors are prone to forgetting that monetary policy operates with a lag.
Sentiment has turned negative and better than expected U.S. economic reports are being ignored. Investors are becoming more impatient with the slowness of the U.S. recovery and are moving some of their assets out of the dollar. Equities markets didn't help. They fell as the continuing stream of disappointing earnings and prospects for third quarter profits made investors become more risk averse and think about bonds. All equities indexes followed here except the South Korean Kospi were down on the week.
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Wither the dollar?
