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Strategies & Market Trends : Mish's Global Economic Trend Analysis -- Ignore unavailable to you. Want to Upgrade?

To: mishedlo who wrote (26298)3/25/2005 4:54:42 AM
From: Haim R. Branisteanu  Read Replies (1) | Respond to of 116555
Euro could collapse in reforms, warns King
By Malcolm Moore, Economics Correspondent (Filed: 25/03/2005)

The Governor of the Bank of England yesterday warned that the euro could collapse in the wake of reforms to the European stability and growth pact.

"In the long run, it is difficult to imagine monetary union being successful without genuine cohesive fiscal discipline," said Mervyn King to a select committee of MPs.

"It is clear that my Central Banking colleagues are seriously concerned, indeed dismayed would be a better word, at this turn of events. The [European] Finance Ministers have driven a coach and horses through the stability and growth pact," he said, stressing that fiscal discipline was crucial to the single currency. "Whatever words you might use to describe those changes to the pact, it is not discipline," he added.

The pact states that members of the European Union cannot have a budget deficit of more than 3pc of GDP. However, since more than half the members of the eurozone have breached the rules since the euro was launched, the pact was redesigned this week with several loopholes.

The watered-down rules will exclude the costs of German reunification, French rearmament, Polish peacekeeping and an array of public investment. The move was immediately attacked by the Bundesbank, which said the exemptions would "crucially weaken the pact".

The Bundesbank also emphasised the risk to the euro, saying: "The possibility of a deterioration in the underlying conditions for the single European monetary policy is a matter of serious concern."

The collective budget deficit across the European Union is currently 2.9pc, and one analyst said that since European interest rates are set collectively, fiscal rules should also be set collectively. "I would only be concerned if the budget deficit was 5pc to 6pc of European GDP," he said.

Simon Hayley, at Capital Economics, said: "The death of the pact will not lead to fiscal anarchy. The pact had already lost all credibility. Replacing it with a watered-down version merely recognises this fact."

The Governor did give his approval to the UK Budget, delivered by the Chancellor last week. He told the MPs, who were questioning members of the Monetary Policy Committee on the February Inflation Report, that the Chancellor would meet his fiscal rules.

He said: "It looks very much as if in a year's time that the Golden Rule will be met." He also said that he did not doubt that the Golden Rule would be met over the course of the next economic cycle, based on the Treasury's projections. "I have no reason to doubt those numbers," he said.

The Treasury is forecasting that the economy will grow at 3pc-3½pc this year, and 2½-3pc next year. By contrast, the Bank of England expects that growth will be lower than 3pc until 2006, under its central projection.

To: mishedlo who wrote (26298)3/25/2005 8:47:13 AM
From: Haim R. Branisteanu  Respond to of 116555
Traders are increasing bets on the extent to which U.S. rates will rise. Eurodollar futures contracts show traders and investors expect the Fed to raise its benchmark rate to at least 4 percent by the end of 2005, from 2.75 percent, after the central bank on March 23 noted ``pressures on inflation have picked up.''

The December Eurodollar futures contract yielded 4.305 percent today, up from 3.905 percent a month ago. It settles at a three-month lending rate that has averaged about 0.21 percentage point higher than the Fed's target rate in the past 10 years.

`Take a Break'

Gains in the dollar may be limited by speculation the rally will prompt some investors to bet the advance is excessive.

A technical indicator suggested the dollar is poised to fall. Its 10-day relative strength index against the euro fell to 29.70, and against the yen was at 68.08. The index is a gauge of momentum in a given period, and a level above 70 or below 30 suggests a change in direction.

``The long weekend in Europe and the U.S. will keep the market quiet, making it more likely the dollar will take a break from its rally,'' said Tetsu Aikawa, a currency sales manager in Tokyo at UFJ Bank Ltd. ``The run-up has been fast enough to trigger concerns of a pause.''

The dollar may drop to 105.80 yen and $1.2990 per euro today, he said.


Citigroup Inc., the biggest financial services company, advised selling the dollar against the euro as it contested the view that the Fed is more likely to raise interest rates in larger increments this year.

``We disagree with this interpretation of the Fed's statement and disagree with the view that a 50 basis point tightening is more likely,'' Steven Saywell, chief currency strategist in London at Citigroup, wrote yesterday in a report. The bank expects the dollar to drop to $1.3670 per euro.

The Fed's benchmark rate exceeds the European Central Bank's key rate by three quarters of a point, the biggest gap since March 2001. The next U.S. policy-setting meeting is May 3.

`Dollar Supportive'

The U.S. next week is forecast to say the economy added more than 200,000 non-farm jobs for a second month in March, according to a Bloomberg survey of economists.

U.S. consumer prices rose 0.4 percent in February, the most in four months and more than the 0.3 percent median forecast in a Bloomberg survey of economists, the government said on March 23. A Labor Department report the day before showed wholesale prices rose for a second month in February.

``The dollar's upward trend is going to continue,'' said Toru Umemoto, market analyst in Tokyo at Keio University's Global Security Research Center. ``Yields are rising, and the U.S. economy is strengthening. All of this is dollar supportive.''