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Currencies

By Anne D. Picker, International Economist, Econoday     Monday, May 21, 2001

Currencies
The dollar fell against the euro as the Federal Reserve lowered its benchmark interest rate, citing weakness in the economy and suggesting further reductions may be ahead. The market is concerned that this cut might prove to be too much with a revival of growth possibly inciting inflation and deterring investors from moving funds into the United States. Since the start of the year, the dollar has gained 7 percent against the euro amid concern the ECB was too slow to lower rates to fend off slowing growth. However, once again the euro wasn't able to maximize its position against the dollar as the equities markets celebrated the Fed's actions and took earnings warnings pretty much in their stride.

The Bank of Japan, which said it plans to buy a wider array of government debt, sparked concerns it will flood the market with yen to stimulate the economy. Boosting the money supply may stimulate growth by making it cheaper to borrow, spurring consumer spending. Adding to the pressure on the yen was the anticipated index restructuring by MSCI, which is anticipated to impact Japan heavily because of the cross ownership of equities.

The yen continues to be very sensitive to comments from new Japanese officials. The yen rallied Thursday on unsubstantiated talk that Vice Minister of Finance Haruhko Kuroda said Japan is not seeking a weaker yen. The comments spread quickly through the trading community, raising the value of the yen.

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