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The euro plunges below parity and stays there Financial Markets
Europe On the week, the FTSE inched up 29.2 points or 0.5 percent to end Friday at 6375.6. The DAX climbed 73.85 points or 1.1 percent to close the week at 7066.6, and the CAC rose 49.7 points or 0.9 percent to close at 5731. The focus on interest rates will remain sharp next week. The European Central Bank meets on Thursday and the Bank of England the week after. Analysts expect the Bank of England to increase rates at that time. Currently, the European Central Bank's policy setting rate is three percent while the Bank of England's is 5.75 percent. Asia At the beginning of the week, the Nikkei celebrated after Japan's G-7 partners (United States, Canada, United Kingdom, Germany, France and Italy) expressed concern over a strong yen. However, many market players worried that the G-7 statement expressing sympathy for Tokyo's concerns about a strong yen was mere lip service as it did not pledge action to stem the currency's rise. The Hong Kong Hang Seng index outperformed everyone last week, vaulting 7.1 percent. But as illustrated in the graph below, they still have a long way to go before they recapture the record market highs achieved at New Year's. Hong Kong is very sensitive to changes in U.S. interest rates.
Currencies It should be remembered that the original intent of the euro was to facilitate trade by eliminating currency barriers within Europe. That the euro would challenge the dollar for world supremacy was part of the rhetoric leading up to its introduction last year.
Foreign exchange traders have largely ignored further evidence of stronger growth in Europe's core economies, including an almost 5 per cent year-on-year increase in French consumer spending and an impressive rise in Italian retail sales. Just as significantly, the euro has failed to gain from Chancellor Gerhard Schroeder's plans, announced a month ago, to modernize the German tax system and accelerate corporate restructuring in Europe's biggest economy. The European Commission said that the euro's drop against the dollar and yen gives businesses their best cost advantage since the 1980s. But others have interpreted the failure of the euro to gain from the sell off in U.S. stock markets as a sign of flagging confidence in the pace of reform in Euroland. Also, new evidence that the U.S. economy continues to outstrip Euroland's performance put new pressure on the euro, pushing it down to new lifetime lows against the U.S. dollar. The currency remained well below parity with the U.S. dollar on Friday, at a new low of $0.9750. Falling below parity with the U.S. dollar is a painful psychological blow that could undermine investors' confidence in the euro. At the start of the year the euro staged a short lived recovery. However, the currency fell after it became clear to traders that the European Central Bank, after a meeting of central bankers last week in Tokyo, had no plans to support the currency. While the euro's weakness is bound to give exporters - and the Euroland's economy - another boost, it will drive up the price of oil imports and it could fuel inflation. Analysts attributed the euro's poor showing on the financial markets to the strength of the U.S. dollar and sterling, both of which have been boosted by the prospect of respective interest rate increases. Euroland interest rates stand at 3 percent, making loans cheap for consumers and businesses. In contrast, the British base rate is 5.75 percent and is expected to rise when the Bank of England meets again. Similarly, the Federal Reserve is expected to announce an interest rate increase from its current level of 5.5 percent on Wednesday. This in turn will make investments in dollars and pounds even more attractive. Bank
of England sells gold The
European Central Bank deliberates Thursday December harmonized consumer price index rose 0.4 percent on the month and 1.7 percent on the year because of surging in energy prices. December core inflation - excluding energy, food, alcohol and tobacco - rose 0.1 percent and 1.1 percent on the year. Individual country data show that the strongest gains in the annual rate were reported for Ireland (3.9 percent) followed by Austria (1.7 percent). Seven of the 11 EMU member states posted annual HICP gains of at least 0.3 percentage points, and six now have annual inflation rates above 2.0 percent. December M3 money supply when compared with last year, pushed the three-month moving average for the October to December period to 6. percent, after an unrevised increase of 6.0 percent for the September to November period. This is still substantially above the ECB target of 4.5 percent for money supply growth. Getting
ready for the Bank of England's meeting The RPIX increased by 0.2 percent on the month and 2.2 percent when compared with last year. The all inclusive retail price index (RPI) rose 0.4 percent on the month and by 1.8 percent on the year. The retail price index excluding both mortgage interest payments and indirect taxes (RPIY) rose 0.2 percent on the month and by 1.8 percent on the year. For 1999 as a whole, RPIX averaged an annual rate of 2.3 percent, the lowest rate since 1994. Average RPI for 1999 rose 1.5 percent, which is the lowest rate since 1960. December seasonally adjusted retail sales volume rose 0.6 percent on the month and 5.3 percent when compared with last year. Analysts said that the December data probably reflect additional spending because of the Millennium. December retail sales showed particularly strong growth in the food category, which rose 1.8 percent. Alcohol sales were very strong, especially champagne. Sales of fireworks and jewelry were also strong according to anecdotal reports from retailers, suggesting a bumper New Year. Preliminary fourth quarter gross domestic product at factor cost rose 0.8 percent and 2.7 percent when compared with last year. The annual rate of expansion is now at its highest in almost two years. Fourth quarter service sector output rose 0.9 percent and was up 2.9 percent when compared with last year. No data for the production sector are published in this preliminary release. The fourth quarter is the 30th quarter in succession without a decline, which stretches back to the end of the 1992 recession. This is the longest period without negative growth since the 1970's. Indicator
Scoreboard December's unadjusted merchandise trade surplus fell 20.4 percent from a year earlier for the ninth straight monthly drop. Exports climbed 3.4 percent while imports gained 15.8 percent. The surplus with the United States slipped 0.1 percent, with exports up 3.5 percent and imports up 7.3 percent. The surplus with the EU fell an annual 16.3 percent. The surplus with all of Asia was up 2.2 percent, while the surplus with the Association of South East Asian Nations dropped 13.5 percent. A provisional release for calendar year 1999 showed the overall trade surplus down an annual 11.7 percent. December industrial production fell a seasonally adjusted 1.4 percent. The fall came after a rise of 4.5 percent in November. Shipments fell 1.1 percent and inventories were down 1.6 percent. Americas - Canada November retail sales jumped 0.6 percent on a 3.1 percent gain in the automotive sector. When compared with a year earlier, total retail sales were 6.1 percent higher. Excluding sales at motor and recreational vehicle dealers, retail sales were down 0.5 percent on the month, but up 5.4 percent on the year. The December Industrial Product Price Index jumped 0.6 percent. If the exchange rate had remained unchanged from November to December, the index would have increased by half as much - 0.3 percent. The 12 month increase hit a four year high in December because of strong price increases for petroleum and nonferrous primary metals. Prices for industrial products increased 3.9 percent when compared with last year, the largest year over year increase since December 1995. The rising value of the Canadian dollar tempered this increase. If the exchange rate had been the same in December 1999 as in December 1998, the IPPI would have increased by a more substantial 5.0 percent. Manufacturers paid 33.9 percent more for raw materials in December 1999 than they did a year earlier. This is the highest increase since prices for the Raw Materials Price Index (RMPI) were first recorded in 1981. If the mineral fuels category, almost all of which is crude oil, were excluded, the increase in raw materials prices would have been 6.8 percent. Crude oil prices rose 142.9 percent between December 1998 and December 1999. For the year 1999 manufacturers paid an average of 7.9 percent more for raw materials than in 1998. This followed two straight years of declines in the RMPI, which fell on average 14.5 percent in 1998 and 1.6 percent in 1997. If mineral fuels were excluded from the total, 1999 raw material prices would have decreased 1.1 percent from 1998, instead of increasing 7.9 percent. Crude oil prices rose an average 36.5 percent in 1999. The
Bottom Line Analysts say that until ECB policy makers change their rhetoric and become less complacent about the euro, the improved growth in the European Monetary Union will be virtually ignored. The ECB, which meets on Thursday, will hold a press conference at its conclusion. The markets will be watching - and listening - very carefully to what is said. With inflationary pressures increasing and the interest rate spreads between the EMU and the United States and United Kingdom set to widen, the markets will be looking for an affirmation of euro support from policy makers. While the lower interest rates are good for borrowers, the higher rates elsewhere attract investment funds. Looking Ahead: Week of January 31 to February 4
Release dates are subject to change. For U.S. data releases, see this week's Simply Economics.
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