Still dazzled by the flourishing US economy, foreign investors are chasing after the dollar and thereby contributing to the woes of a declining euro.
European officials in recent months have repeatedly insisted that it is the strength of US economic growth — notably when compared with that of the euro zone — that explains the health of the US currency.
The US expansion, now in a record setting 10th year, is expected by the National Association of Business Economists to yield annual growth of 5.2 percent this year and 3.3 percent in 2001.
In the 11-nation euro zone growth is projected to reach 3.5 percent in 2000, a progression seen as a solid accomplishment for Europe, and three to 3.5 percent the following year.
Even as signs emerge that some of the steam has gone out of the US economy, growth figures in the United States continue to defy projections by economists at the International Monetary Fund and elsewhere.
For several years they have predicted that growth in the euro zone would surpass that posted by the United States — and they have been wrong every time.
With US households spending more than they earn and as the gaping deficit in the country's current account expands, demand for foreign investment in the United States is vigorous.
The current account shortfall is expected to hit a record $440 billion this year, 4.4 percent of gross domestic product.
Under such circumstances, the possibility that foreign investors — for whatever reason — might one day send shockwaves through financial markets by taking their money out of the United States should in principle weigh heavily on the dollar.
But the greenback has so far resisted such pressures, which analyst Kermit Schoenholtz of Salomon Smith Barney attributes to a sustained flood of both stock market purchases and direct overseas investment in US companies and subsidiaries.
"A combination of massive portfolio inflows and direct investment continues to swamp the funding needs created by the external deficit," he said.
In the first half of the year, foreign non-bank capital flows came to $750 billion, of which 200 billion was in the form of direct investment. The total already eclipses the amount reached in all of 1999.
Corporate profits in the United States are meanwhile expected to increase 19 percent in the third quarter, according to estimates from financial analysts at First Call.
The US dollar is also well supported by the difference in US and euro zone interest rates. The US Federal Reserve's benchmark federal funds rate now stands at 6.5 percent, against a base rate of 4.5 percent in Europe.
In addition, the US currency benefits from consistency in official government policy, with officials at the US Treasury Department repeating at every turn that "a strong dollar is the best interests of the United States."
The euro, by contrast, has been hurt by the sometimes contradictory observations by European officials responsible for the currency.— (AFP)
© Agence France Presse 2000
© 2000 Mena Report (www.menareport.com)
