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Rates drive dollar
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July 24, 2000: 10:45 a.m. ET
U.S. interest rates could go even higher, bringing dollar up with them
By Gordon Platt
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NEW YORK (CNNfn) - Not only are U.S. interest rates higher than European and Japanese rates, but they may rise further, analysts said.
"Interest rate expectations are driving the dollar," said Bob Sinche, head of global currency strategy at Citigroup.
 "The stock and bond markets have become too complacent," he said. "Citigroup expects the Federal Reserve to raise rates 25 basis points in August."
Sinche said the economy has not slowed very much, and that it could speed up again in the third quarter.
The second-quarter gross domestic product data, to be released Friday, will show a rise of close to 4 percent, he forecast. That would be a modest slowing from 5.5 percent in the first quarter.
"And the second quarter is supposed to be the weakest quarter, with a pickup in the third quarter," Sinche said.
Strong U.S. economic data would increase the likelihood of a rate rise, said Bob Lynch, currency strategist at Paribas.
"It looks like there will be a soft landing, if there is any landing at all," Lynch said.
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He said the economic scenario presented last week in Congressional testimony by Fed Chairman Alan Greenspan was upbeat and that the markets reacted positively.
"The imbalances in the economy haven't been corrected, but they are on the way to being corrected," Lynch said. "Productivity could be on a permanently rising trend."
He said the dollar will start to move higher again because of the positive economic environment.
Greenspan gave the dollar a vote of confidence last week.
"So long as foreigners continue to seek to hold ever-increasing quantities of dollar investments in their portfolios, as they obviously have been, the exchange rate for the dollar will remain firm," he said.
Analysts said Fed policymakers will pay close attention to Thursday's report on the Employment Cost Index for the second quarter. The consensus forecast of a 1.0 percent increase would be less than the 1.4 percent rise in the first quarter, but the year-to-year increase would be more than 4 percent.
Labor markets are still tight and wage inflation remains a risk, analysts said.
Japan faces short-term difficulties
Meanwhile, the bankruptcy of Japan's department store chain Sogo Co. two weeks ago soured sentiment on Japanese financial markets, Lynch of Paribas said.
"This opens up speculation of additional bankruptcies in the pipeline," he said. "And the government won't help the creditors."
Analysts said the ruling Liberal Democratic Party favors getting the bankruptcies out of the way now that the election is over.
"The Sogo bankruptcy marked a major turning point in Japanese economic history," said Dennis Gartman, editor and publisher of The Gartman Letter.
"Japan's banks are in store for more and larger loan problems as more companies are allowed to plunge in the bankruptcy pool they should have been allowed to plunge into a decade or more ago," Gartman said.
Japan will be better for this shift in the long run, he said, but in the short run, things will be more and more difficult.
As a result of Sogo, Japanese rate hikes will be later and lower than expected, said Sinche of Citigroup. This already has put downward pressure on the yen, which dropped below its 55-week moving average of 107.90 to the dollar Friday, closing near 109.18. The yen strengthened moderately to around 108.67 early Monday, but analysts remained bearish.
The euro, meanwhile, also survived a breakdown last week. It fell below its 55-day moving average Thursday but bounced off 92.25 cents to 93.71 Friday. The euro slipped to 93.33 cents in early trading Monday. 
-- Gordon Platt is a freelance columnist writing about currency markets for CNNfn.com
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