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Market barometer: Watch for substantially weaker US dollar

Friday 15th December 2000

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Euro vs $US

The world is bracing for a slowdown in the US economy. The slowdown could be to the benefit of most sharemarkets if inflationary pressure from the US subsides and interest rates cap out and decline.

US companies and consumers could do with some debt relief from lower interest rates. Internationally, one result of a slowdown could be a substantially weaker US dollar.

Many currencies, including the yen and the kiwi, are imitating the euro and climbing against the greenback (illustrated).

The Economist has raised the more disturbing spectre of a recession hitting the US. The magazine argues soft landings are hard for the Federal Reserve to engineer and the only time this was achieved was in 1994.

Points of concern it identified are heavy reliance on capital investment as the engine of US growth, a credit crunch as banks such as Bank of America issue profit downgrade warnings and cut back on lending, and a savings deficit by US households already battered by high debt and heavy sharemarket losses.

New Zealand's position appears worse than that of many OECD countries due to its high inflation and interest rate outlooks for next year despite the expected world economic slowdown. New Zealand's trade position could worsen as our political relationship with Australia deteriorates.

The Economist noted Australia intends to boost defence spending by $13 billion over the next decade but that Australian defence officials dubbed isolationist New Zealand as "useless" as a military ally.

That judgment and a spat over welfare and immigration policies have put New Zealand on the wrong side of its major trading partner at a time of a possible global economic downturn.

The NZSE top-40 capital index is lifting from 1950 while the smaller companies capital index is crawling back up from 5000. Telecom continues to drag on the broader market as it tracks around 560cps.

The latest company to talk about shifting head office to Australia and branch officing New Zealand is Tower, which lifted to 540cps on the news.

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