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Analysts see stronger euro
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June 12, 2000: 10:07 a.m. ET
With fundamentals good, it also could benefit from U.S. economic slowdown
By Gordon Platt
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NEW YORK (CNNfn) - The euro enjoys improving fundamentals and could add to its recent gains if new data this week confirm the U.S. economy, is slowing, currency traders and analysts said.
The next big issue for the markets, they said, is whether or not the Federal Reserve will raise interest rates at its next policy meeting June 27-28.
"I think that there is a chance that the Fed will raise rates by a quarter point later this month," said David Solin, partner at Foreign Exchange Analytics in Essex, Conn.
 Recent comments by Fed governors have had a hawkish bent, he said. "It's still a toss-up, but Fed officials keep mentioning the possibility of a breakout of inflation."
Market participants ruled out another half-point increase in the federal funds rate, and many said they expect the Fed to pause in its tightening in light of the recent signs of slowing in the economy.
"The 50-basis-point increase in May, combined with the previous moves by the Fed, and weaker economic data should encourage them to wait," said Bob Lynch, currency strategist at Paribas in New York.
"There will be no change in rates in June," Lynch predicted.
Last week's half-point increase in rates by the European Central Bank was more aggressive than expected, but failed to give the euro a lasting boost.
Traders remember that the previous moves by the ECB to raise rates in November, February, March and April did nothing to support the euro, Lynch said.
"This time, however, conditions are different," he said. "There are diminishing expectations of Fed tightening and, what's more, the euro is in a rising trend."
The euro initially shot higher on news of the European rate hike Thursday, but quickly fell back on worries that the higher rates could slow Europe's growth.
Analysts noted that ECB President Wim Duisenberg said the half-point rise "cleared the horizon," and they agreed that European rates are on hold for now, and perhaps for the summer.
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The euro needs some time to consolidate its sharp gains of the last few weeks, said Solin of Foreign Exchange Analytics.
"It rose eight big figures (eight U.S. cents) in a couple of weeks," he said. "Some traders may have decided to take some money off the table."
The euro hit a record low of 88.49 U.S. cents on May 4 and then climbed to 97 cents before slipping back to 95 cents Friday.
Background news favorable
Once the euro digests its recent gains it should start moving higher again, analysts said. Many expect it to regain parity with the U.S. dollar in the months ahead.
"The background news is favorable for the euro," Solin said. "The euro zone economy is bouncing back and the U.S. economy is slowing."
The ECB's decision last week to switch to variable-rate repurchase agreements from fixed-rate repos could add some extra volatility to short-term interest rates in Europe and could affect the euro's value from time to time, said Lynch of Paribas.
The ECB changed its procedure to gain better control of its weekly auctions of two-week paper, which have had a severe over-bidding problem, Lynch said. Using the new procedure, banks may bid for only as much paper as they actually need, he said.
"The euro is doing fine," Lynch said. "It is consolidating, but in general will continue to strengthen."
Analysts said recent strength in the yen will subside following Friday's disappointing report on the Japanese economy. The dollar rose above 106 yen on news that Japan's first-quarter gross domestic product increased at a quarterly rate of 2.4 percent, which wasn't strong enough to meet the government's target of 0.6 percent growth in the fiscal year ended in March.
"It looks like any move by the Bank of Japan away from its zero-interest-rate policy has been pushed out even further into the future," Solin said.
"The dollar may rise against the yen. That could be the play," he said.
Looking for signs of a slowdown
Meanwhile, traders will be watching this week's heavy schedule of U.S. economic releases for confirmation of signs of slowing. May retail sales, due Tuesday, and industrial production Thursday are expected to be soft.
A key report could be the consumer price index Wednesday, although most economists expect it to show that inflation remains tame. Wholesale prices were unchanged in May, but the core rate, which excludes food and energy, rose 0.2 percent.
"With various indicators showing signs of softening, the Fed will probably hold steady on June 28," said Michael Moran, chief economist at Daiwa Securities America Inc. "We do not think they are finished for the year, but they do not have a compelling case to push further ahead after a 50-basis-point adjustment in May." 
-- Gordon Platt is a freelance columnist writing about currency markets for CNNfn.com
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