Currencies
Many market players are worried about the impact of a slowing U.S. economy on the rest of the world. With European economic growth characterized as anemic at best, worries remain that the eurozone economy could slow even further. This would not help the euro. In recent weeks many investors have hoped that the European economy might be immune to the ills of the United States, but that hope is fading fast. Though the U.S. recovery is proving softer than predicted, the U.S. Federal Reserve Bank is viewed as more pro-active in its approach to managing the economy and is therefore seen as more likely than the European Central Bank to cut interest rates to boost growth. The Fed has cut interest rates 11 times in an effort to stimulate the U.S. economy. By comparison, the ECB has cut rates only twice since September 11.

The strength in the equities markets bolstered the U.S. dollar against both the yen and euro. But the recent rise in the euro has started to take an unexpected toll on European stocks. The euro dipped to a low of 83.66 cents in July 2001, but last month it roared back above parity, albeit for just a few days before falling back. But the euro's rise is threatening to crimp profits at the American operations of big European firms, which can weigh heavily on the parent company's bottom line. Conversely, it helps U.S. companies with heavy commitments in Europe. The impact of currency movements on profitability is something that Japanese exporters are used to. As the yen has gained strength over the last few months, fears for the recovery and profitability of Japanese companies have grown.

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