Recovery in US hits euro/dollar sentiment

THERE is increasing confidence that recovery in the US is pushing euro/dollar sentiment in both directions.

Prior to New York opening yesterday the euro lost ground to the dollar, but recovered in afternoon trading. Having been worth $1.1260 in early trading based on US recovery sentiment, the dollar lost ground in the afternoon on the back of the same sentiment.

By late afternoon the euro climbed to $1.1340 as US investors sold the dollar.

Irish economists are divided on where the exchange rate will end up. Niall Dunne, economist Ulster Bank Financial Markets, believes if the US recovery story is to hold then it will do so on the back of a weaker dollar.

Mr Dunne is forecasting the euro to be worth $1.20 by the year end.

By comparison Colin Hunt, chief economist, Goodbody Stockbrokers believes the dollar will move towards parity as confidence in the US recovery grows.

He is bemused by the shift in sentiment about US recovery. “A few short weeks ago, despite ample evidence of building recovery and a US reflation which is unprecedented in scale, we were looking forward to further interest rate cuts.

“Today the futures unambiguously suggest that the rate-cutting epoch is at an end and some forecasters are beginning to pencil rate hikes into their Q4 2003 outlook.”

Hunt agrees with the recovery story. But expect no hike in US interest rates any time soon, he warned.

In his view the first hike in US interest rates could be as late as April, 2004. He has not ruled out a further cut in ECB rates as the economy still flounders.

Markets may differ about what will happen to the currencies as the US moves into higher growth but the overwhelming view yesterday was that a fresh batch of statistics due this week will confirm that recovery is underway.

Today the FOMC meets in the US and is expected to keep interest rates on hold.

What Alan Greenspan, chairman of the US Federal Reserve, says about the state of the recovery could be pivotal, economists said. If he goes too bullish on economic recovery, then it could force up the cost of bonds and shove up the cost of mortgages.

With the consumer a vital element in any US recovery Mr Greenspan will be keen not to over play the recovery for that reason.

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