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Currencies

By Anne D. Picker, International Economist, Econoday     Monday, January 29, 2001

Currencies
The dollar benefited from expectations that the Federal Reserve would lower interest rates again when it met on Tuesday and Wednesday. Ironically in 1990, the dollar fell on lower interest rates. This time around, however, falling interest rates are being interpreted to mean that the United States will spring back to life after a momentary pause. Those who believed that the euro would be a safer haven in the event of a U.S. downturn are looking at the better U.S. earnings and sales reports in contrast to downward revisions in EMU growth figures. They are concluding that perhaps they had jumped too soon into a long euro position.

The dollar made its biggest gains against the euro and yen in three weeks on Wednesday, helped by concerns about European inflation prospects and the U.S. government's commitment to a strong currency. The euro fell to a one month low as officials of the European Central Bank played down the chances of an imminent reduction in EMU interest rates and indicated that it was too soon for any "all clear" message on inflation. ECB President Wim Duisenberg and Chief Economist Otmar Issing reinforced comments from Bundesbank President Ernst Welteke that the ECB was not ready to mimic the U.S. Federal Reserve by cutting rates. Both Duisenberg and Issing said that the long term effects of last year's high oil prices could still threaten price stability in the single currency.

The yen suffered the uncertainties of a new administration in Washington when rumors circulated that the new Bush economic team would favor a weaker yen of about 120 yen to the dollar. The White House denied it.

The graph above shows the number of yen per U.S. dollar over the last ten years. The more yen to the dollar, the less the value. The interesting point here is that despite its ailing economy, the yen has remained relatively strong over the past two years.

Bank of Japan Governor Hayami commented Tuesday that he was not considering a return to the zero interest rate policy (ZIRP) and that he was opposed to quantitative easing. He also said that it was inappropriate for the Bank of Japan or the government to design policies to aid sinking equity prices specifically. He added that the yen's weakening was the result of foreigners selling Japanese equities and that he would not like to see the yen's decline further.

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