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Euro rise expected
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June 19, 2000: 11:21 a.m. ET
To benefit from euro-zone growth and U.S. and Europe interest rate gap
By Gordon Platt
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NEW YORK (CNNfn) - Accelerating growth in the euro zone and a U.S. economic slowdown will lift the euro back up to par with the dollar soon, analysts forecast.
"The Federal Reserve is nearing the end of its tightening cycle, and the European Central Bank could tighten more," said David Gilmore, partner at Foreign Exchange Analytics, based in Essex, Conn. ECB monetary policy is not yet  restrictive, he said.
Narrowing growth and interest-rate differentials between the United States and Europe provide a fundamental basis for the euro's rise, Gilmore said.
"The euro rallied from mid-May to early June on the slower U.S. growth story," said Bob Lynch, currency strategist at Paribas.
Recent U.S. economic data, including weaker-than-expected retail sales and declines in housing starts and permits in May, have tended to confirm the U.S. slowdown, he said.
"The euro will go up," Lynch predicted. "Market participants are waiting for more consistent evidence of a U.S. slowdown."
Analysts said the signs of slowing to date may not be enough to satisfy the Fed that the economy has cooled enough that it will not generate inflationary pressures.
"The message from Fed officials is clear: You don't take a record expansion and shut it off with two months of data," said Gilmore of Foreign Exchange Analytics. "There is no risk of a hard landing."
Gilmore said he expects the Federal Open Market Committee to raise rates one-quarter point at its next meeting on June 27-28. Although most market participants expect the Fed to pause in its tightening. Gilmore said the FOMC might feel some urgency to act. "More tightening is still needed," he said. "The Fed has to consider the election calendar. They can't delay until late summer or fall, when it might be politically more difficult."
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Meanwhile, the U.S. economy's only real blemishes, the soaring current account deficit and the gaping trade deficit, will be in the spotlight Tuesday. While the trade gap for April is expected to narrow slightly from the record $30.2 billion deficit posted in March, the first-quarter current account deficit could expand by about 10 percent to more than $100 billion, economists forecast.
"The market hasn't paid much attention to the trade data, but at some stage, they will be a factor," said Lynch of Paribas.
If the dollar's recent weakness signals a major turn downward, concerns could begin to rise about the ability of the United States to attract sufficient foreign investment to finance the current account deficit, analysts said.
The Japanese yen has remained relatively firm around 106 to the dollar, despite pre-election jitters, with Prime Minister Yoshiro Mori's job on the line in the June 25 lower house elections. The ruling Liberal Democratic Party is not expected to do well, and Mori's approval rating has fallen to a record low of 19 percent.
The yen is being buoyed by expectations that the Bank of Japan could soon abandon its zero-interest-rate policy, analysts said. It may not have a basis to do so, however, if the Japanese economy stalls or continues to muddle along, they said.
"The data are not strongly arguing for a rise in rates," Lynch said.
If fiscal conservatives gain power in Japan, there will be no deficit financing to stimulate the economy, analysts said.
The yen failed to gain much benefit from the easing of tensions in the Korean peninsula. The market's focus is on domestic considerations in Japan, analysts said. The next key report on Japan's economy will be the "tankan" report, a survey of business confidence to be released on July 4. 
--Gordon Platt is a freelance columnist writing about currency markets for CNNfn.com
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