Crazy logic of currency markets dictates euro will scale the heights by Ian Bell Business a.m., Aug 16, 2001 THE logic of the money markets is, as we know, impeccable. Nobody ever blunders. Irrational exuberance, like irrational panic, is unheard of. Decisions are made in a calm and reasoned manner by philosopher-princes who debate theology when they are not deciding the fate of currencies. Take the euro. This week, finally, Europe's newfangled medium of exchange has begun to move upwards against the dollar. This is not because economic indicators in the eurozone are particularly inspiring, so we are told, but because poor numbers emanating from the US have persuaded traders to seek refuge. So far, so reasonable. But if the euro is a haven, why not sterling? Rather than reaping the benefit of fears of a US recession, it has struggled to make any ground against the dollar. With German manufacturing in the doldrums it might equally have been expected to hold its own against the euro. Instead, the pound is becalmed. By one account this is no bad thing: sterling, by common consent, is overvalued. By another account, however, the reluctance of investors to back the pound speaks of a lack of confidence and that, as we know, is a Very Bad Thing. There is an imbalance between the consumer sector and the manufacturing sector, we are told, as though no such imbalance exists in the eurozone or the US. The Bank of England is about to cut interest rates again, we hear, as though the European Central Bank has not signalled a similar intention and the US Fed has not been slashing away. Through it all, nevertheless, the euro prospers. Suddenly a currency derided in the British-US investment community is in favour. None of the fundamentals in the eurozone has altered significantly and yet punts are being taken on a currency which has yet to inspire much confidence in its future. Could it possibly be that our sagacious investors simply have no idea what else to do? If so, we are entitled to harbour some fears for the future. Here's one glimpse of reality. Rathbones, the investment manager, estimates that $600bn worth of illegal money may have been converted from existing European currencies into dollars this year - one good explanation for the euro's weakness. That money will probably be converted back into the new single currency next year, pushing it a good deal higher than it is now. Equally, it is believed that in France alone 75% of the country's 500 franc notes - more than £11bn worth - is being hoarded. According to the Banque de France, 120bn francs will shortly be changed into euros or spent. Add to all this a wave of forgeries - principally the Russian mafia working through the Balkans - and the decision by Laurent Fabius, the French finance minister, to allow individuals to exchange up to 65,000 francs no questions asked. The result, come next January, is likely to be a eurozone awash in "cash", a euro hitting the heights, and, soon enough, a European recession to match that of the US. So which of the wise men in the markets have seen it coming? Full article at: http://www.businessam.co.uk/BreakingNews/articles/0,2790,45634,00.html# Michael Keaney Mercuria Business School Martinlaaksontie 36 01620 Vantaa Finland [EMAIL PROTECTED]
