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Currencies

By Anne D. Picker, International Economist, Econoday     Monday, July 2, 2001

Currencies
Alas, poor euro. It sank close to its all time low at midweek as the Federal Reserve displayed once again its determined approach to monetary policy. In Europe, disappointing economic news and volatile equities markets continued to favor the dollar. The euro began the week with a firm tone thanks to signs that European inflationary pressures eased in June, a factor that outweighed continued signs of slowing economic growth. This led to expectations that the ECB might be willing to cut interest rates when they meet on July 5. However, the euro sank following the Fed rate cut. It weakened further on Bundesbank President and ECB Council Member Ernst Welteke's suggestion that interest rate cuts have yet to help the U.S. economy and that European interest rates are already at an appropriate level. An acceleration in M3 money growth further dimmed hopes of a rate cut at the ECB meeting.

The yen for the most part traded narrowly against the dollar for most of the week. The yen slid only slightly in the post-Fed period reflecting the tendency for the currency to do well on positive U.S. economic indications, since a U.S. downturn is seen as threatening a Japanese economic collapse. But the yen was troubled by continued negative economic news at home: rising unemployment, declining production, continuing deflation. Japanese officials appeared to lend verbal support to the yen by indicating they are not seeking a weaker currency and would counter any sharp moves. The lack of action once again by the Bank of Japan didn't help either. Looming on the horizon were Prime Minister Kuizumi's meeting with President Bush on Saturday and Monday's tankan survey release, which is expected to paint a rather gloomy picture of economic expectations.

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