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Hard times for the euro
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August 21, 2000: 10:27 a.m. ET
U.S. dollar continues to outperform on strong economic growth, low inflation
By Gordon Platt
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NEW YORK (CNNfn) - Four times the euro tried to rise above 92 U.S. cents last week, and four times it fell back, unable to sustain a rally.
"The euro is running out of buyers," said Andrew Chaveriat, currency technical analyst at BNP Paribas.
The market already has priced in a European rate hike, so it will have to take something else to turn the euro around, Chaveriat said.
The longer the euro stays below 92 cents, the more likely it is to begin weakening again, he said.
"A rate hike will be no panacea for the euro," said David Gilmore, partner at Foreign Exchange Analytics, Essex, Conn.
 If the European Central Bank raises rates by 50 basis points at its next meeting on Aug. 31, it could provide some support for the euro, Gilmore said. But if the ECB waits until Sept. 14 and then raises rates by only 25 basis points, that isn't going to help, he added.
"The market is pretty bullish on the dollar," Gilmore said. "With the U.S. economy enjoying low inflation and strong growth, and with the stock market picking up again, it makes it a tough go for the euro," he said.
Foreign direct investment flows are still coming into the United States from Europe, which is keeping the dollar strong despite the record U.S. trade deficit.
The dollar's strength is helping to keep a lid on U.S. inflation, whereas the euro's weakness is compounding Europe's efforts to cope with rising import prices, which will be passed on to the consumer.
Eurozone annual inflation remained at 2.4 percent in July, but was still above the European Central Bank's 2.0 percent ceiling.
Otmar Issing, the ECB's chief economist, told a German newspaper last week that there was no danger that the European monetary authorities would overreact in their response to inflationary pressures.
"According to all criteria, our monetary policy by no means is too restrictive," Issing said. "The danger of an overreaction of the ECB certainly does not exist. We always act on the basis of thorough considerations."
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In other words, the ECB has seriously considered the rising inflationary figures of its constituent nations, and is prepared to tighten monetary policy further, said Dennis Gartman, editor and publisher of The Gartman Letter. "We take Issing at his word," he said.
Eurozone gross domestic product is likely to have grown at an annualized rate of more than 4 percent in the second quarter, said analysts at Chase Securities. Furthermore, the European economy appears to have entered the third quarter with considerable momentum, they said.
Chase analysts expect the ECB to increase its repurchase rate by 50 basis points on Aug. 31 to 4.75 percent. While the Federal Reserve is expected to keep rates unchanged Tuesday, U.S. rates are still considerably higher, they said. Nonetheless, rising European rates will look increasingly attractive relative to Japanese yields, they added.
Yen range-bound
The yen remains range-bound in slow, summer trading. Against the dollar, the yen is trapped in a 2.5-yen range between 107.30 and 109.80, said Chaveriat of BNP Paribas.
The yen rallied Friday on a rumor that U.S. Treasury Secretary Lawrence Summers had stated that the United States no longer favored a weaker yen. In fact, Summers made no such statement.
"There was no substance to this rumor," said Gilmore of Foreign Exchange Analytics. "Nonetheless, it caused a short-covering bounce in the yen."
Analysts at Chase said the yen tends to do well in periods of strengthening global demand -- even when the domestic economy is weak -- because of Japan's large trade surplus with the rest of the world.
With tighter monetary conditions around the world, and the U.S. economy slowing, the support for the yen from the trade balance will likely diminish, the Chase analysts said. 
-- Gordon Platt is a freelance columnist writing about currency markets for CNNfn.com
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