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Euro springs to life
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May 30, 2000: 1:14 p.m. ET
Slowdown in U.S. economy, dollar sell-off could signal new hope for euro
By Gordon Platt
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NEW YORK (CNNfn) - Talk of a reversal in trends spread through the currency markets on Friday, as the dollar was sold off on tentative signs of a slowdown in the U.S. economy.
The euro, which has repeatedly set new lows in recent weeks, came to life and soared to a one-month high of 93.30 U.S. cents, after breaking through key resistance levels at 92.00 and 92.50 cents.
"The strong U.S. economy was behind the dollar's rally, so signs of slowing are hurting the dollar," said Bob Lynch, currency strategist at Paribas in New York.
A slowdown in U.S. home sales and a steep drop in durable goods orders raised hopes that the Federal Reserve could be nearing the end of its tightening. Orders to U.S. factories for big-ticket manufactured goods fell 6.4 percent in April, the biggest drop in nearly nine years.
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Analysts cautioned, however, that durable goods orders are extremely volatile from month to month, and that there is insufficient evidence to date to conclude that the economy is slowing.
"Unless we get some more serious signs of demand slowing, the Fed is expected to raise rates again at its next meeting," said David Gilmore, partner at Foreign Exchange Analytics, Essex, Conn.
 Gilmore said the euro's rally had more to do with the fact that the beleaguered currency had fallen to outrageously low levels, than with any change in economic fundamentals.
"The world hasn't changed," he said. "The market pushed the euro to an extreme position, making the dollar vulnerable to a correction."
The euro fell to a record low of 88.45 U.S. cents on May 4, even though the economic fundamentals in the euro zone are the best they have been in five years, Gilmore said.
Unchanged rates don't hurt euro further
The European Central Bank left its interest rates unchanged last Thursday, but even this failed to depress the euro. Traders said they expect the ECB to raise rates at its next meeting in two weeks.
"Meanwhile, the market already has recognized that the Fed is in a more-aggressive stance, so it is difficult to get more mileage out of that story," said Lynch of Paribas.
"The euro's lows have been seen," declared Dennis Gartman, editor and publisher of The Gartman Letter. "A watershed shift in sentiment toward the euro has taken place."
Europe remains the land of the intransigent, immobile labor and bureaucracy, Gartman said, but he added that the euro's fall to record lows discounted all of the bad news.
Analysts said the market could be on the verge of a broader move out of the dollar, but that the trend needs to be tested in more-active trading conditions. Friday's markets were quite thin ahead of the Memorial Day weekend. The dollar has remained fairly steady against the Japanese yen, despite the rise in the euro.
Yen performance tied to U.S. dollar
"The market is far from convinced about the sustainability of the recovery in Japan," said Lynch of Paribas.
The dollar was trading Friday at about 107 yen and could easily rise to 110 yen, analysts said. The 110-yen level is an important technical barrier because it represents a "double top" for the dollar on chart formations, analysts said.
After the Japanese government admitted errors in its gross domestic product numbers, analysts said this did little to reinforce confidence. On Friday, Finance Minister Kiichi Miyazawa said Japan will not, after all, meet its 0.6 percent growth target for the fiscal year, which ended on March 31.
"Our confidence in the Economic Planning Agency was already low," Gartman said. "Now it is even lower ... and it is falling."
Recent yen weakness also has been tied to declines in the Nikkei stock average. Furthermore, the yen is being restrained by uncertainty about the early general election on June 25.
The ruling Liberal Democratic Party is likely to campaign on the economic recovery story, despite the debacle over the GDP statistics, said analysts at IDEAglobal.com. Prime Minister Yoshiro Mori is seen as a liability for the LDP, they said. Mori's approval ratings fell after he stated that Japan is "a divine nation centering on the emperor."
On top of this, analysts said, there is uncertainty over whether Finance Minister Kiichi Miyazawa will remain in the Cabinet after the election.
-- Gordon Platt is a freelance columnist writing about currency markets for
CNNfn.com. 
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