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Dollar charges on
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July 31, 2000: 10:45 a.m. ET
Overachieving U.S. economy lifts dollar; Japanese economic turmoil burns yen
By Gordon Platt
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NEW YORK (CNNfn) - With the economy extending its run as an over-achiever, the dollar will continue strong against the euro and the yen, analysts said.
"U.S. growth is outstripping expectations," said Bob Lynch, currency strategist at Paribas.
"Meanwhile, there has been a downgrading of growth expectations in Japan," he said.
 The failure of the U.S. economy to slow in the second quarter has increased the possibility that the Federal Reserve will raise interest rates at the Aug. 22 meeting of the Federal Open Market Committee, although the decision is still seen as too close to call.
Gross domestic product grew at a 5.2 percent rate in the second quarter, well above the 3.7 percent forecast by analysts.
"The GDP report calls into question any measurable landing at all" in the high-flying economy, Lynch said.
Friday's report on the employment situation in July could be critical to the Fed's decision on whether or not to hike rates in August, he said.
Fed Chairman Alan Greenspan "has made it clear that he is concerned with what is happening with the economy's growth right now, and not with what occurred in the first and second quarters," Lynch said. "That is why the July job numbers will be important."
Economists forecast a rise of about 100,000 in non-farm payrolls for July, and a dip in the unemployment rate to 4.0 percent from 4.1 percent in June.
"This is one strong economy," said Dennis Gartman, editor and publisher of The Gartman Letter. He said the 10 percent jump in durable goods orders in June, reported last week, came as a shock to economists.
"The sheer size of the increase was stunning," he said. After the sharp gain in May orders, economists were looking for a downward revision in that figure, and a much smaller figure for June. Instead, May's already high number was revised upward slightly and June's figure was astonishingly strong.
"Interestingly, a good portion of the increase was in electronic equipment, that which is used in business and industry to ramp up productivity levels, which will in the long term keep wage pressures down," Gartman said.
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U.S. businesses are doing their best to spend more on capital equipment, knowing that the labor force is tight and is getting tighter, and knowing that the only way to compete is to continue to modernize plant and equipment, he said.
While the economy continues to gallop along, inflation remains relatively tame. The GDP price deflator rose at a 2.5 percent rate in the second quarter, compared with a 3.3 percent rate in the first quarter.
The dollar rose sharply Friday on the GDP report, and analysts forecast that its rally will continue. The euro fell to 92.38 U.S. cents on Friday, close to its 92.00 cent low of the previous week, before edging up early Monday to 92.45 cents.
Analysts noted that Euroland growth has been respectable, which could help to support the euro in the medium term. The French unemployment rate declined to 9.6 percent in June from 9.8 percent in May. At its highs in mid-1997, the French jobless rate was 12.6 percent.
"Death spiral" for Japan?
The Japanese unemployment rate still is headed higher, however, and analysts warned that problems emanating from the bankruptcy of retailer Sogo Co. are beginning to reverberate through the Japanese economy.
Sentiment was further depressed by news Monday that Kimitaka Kuze, chairman of the Financial Reconstruction Commission, has had to step down after reports he received several million dollars in consulting fees from Mitsubishi Trust Bank.
Carl B. Weinberg, chief economist at High Frequency Economics in Valhalla, N.Y., said that if the Nikkei stock index continues to decline, there could be a "death spiral," with broad-based trouble in the Japanese banking sector. Some banks already may have unrealized paper losses on their equity holdings, Weinberg said.
A death spiral is a self-amplifying cycle of stock declines, credit contraction and business failures, he explained.
Even at current levels, it does not pay for Japanese insurance companies to liquidate domestic stocks to raise cash, Weinberg said. They need the funds because more Japanese are converting whole life insurance policies into cash or annuities sooner than expected.
"So the choices are to sell foreign assets or domestic bonds," Weinberg said. "Thus far, we believe they have been selling foreign assets and repatriating the funds into short-term bonds for safekeeping."
These inflows have supported the yen to some extent, he said, because they have exceeded foreigners' disinvestment in Japan's equities, at least so far.
"This is a delicate balance, as foreigners will flee faster from Japan's equities if the Nikkei goes down the tubes," Weinberg said. "We expect a volatile yen, with a downward bias, over the next two months." 
-- Gordon Platt is a freelance columnist writing about currency markets for CNNfn.com
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