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Market barometer: Marketwatchers wait for US interest rate settings verdict

Friday 4th August 2000

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Dow Jones industrial index

Probably the most important news scheduled to emerge this month will be the latest decision by the US Federal Reserve on American interest rates.

The Federal Open Markets Committee (FOMC), which is the arm of the Federal Reserve responsible for interest rate policy, will issue its verdict on August 22.

The chairman of the Federal Reserve, Alan Greenspan, has dampened expectations of continued interest rate increases imposed by FOMC but the proof will be in the pudding.

August 22 will be the last FOMC meeting before the US presidential election campaign goes into full swing.

It is probable the FOMC would want to stay out of politics during the election campaign and so August represents the last likely opportunity to increase US interest rates until the election is out of the way in November.

Thus the August meeting carries more weight than usual in trying to second-guess the overall strategy of the Federal Reserve.

Will the Federal Reserve call a halt to its interest rate-raising policy in August or will we at most see a pause before recontinuation of higher interest rate trends later on in the year?

The FOMC's decision will have a bearing on the behaviour of sharemarkets and bond markets around the world.

It will also affect the New Zealand economy. The Reserve Bank, headed by Don Brash, keeps in step with American interest rate increases.

When Mr Greenspan ups interest rates, so too does Dr Brash.

The lock-step effect arises because New Zealand has to try to defend its free floating currency from collapse should US interest rates start to look much better to investors than New Zealand interest rates.

The currently low dollar is said to be a godsend for exporters and therefore the economy. But the dollar is low because of lack of international confidence in New Zealand.

The latest measure of that occurred when the Singaporean government told the New Zealand government it could not proceed with the Closer Economic Partnership proposed between the two countries unless it received written assurances Singaporeans would not lose property rights in New Zealand because of Treaty of Waitangi claims.

New Zealand has an image problem with overseas investors.

Confidence surveys show a split New Zealand. Rural New Zealand is confident about its economic outlook due to good weather, better export prices, and boosted sales from a low kiwi dollar.

Urban New Zealand is depressed, with businesses citing higher interest rates, higher import costs due to a weak kiwi currency, slackening consumer demand, and poor government policy. The two parts of the economy are painting opposite pictures.

Farming still dominates the export sector and so should boost our economy but the domestic, mainly urban, economy is bigger than the export sector and is slowing down for its own reasons.

The jury is still out on whether our economy is headed up or down in trend but it is to be noted that smaller Asian economies, which are also heavy exporters, are in danger of downturn because their currencies have been sliding in value as well.

The Asia-Pacific area could be falling out of investor fashion.

Sharemarket investing presents three gambling strategies.

The first involves rurally exposed companies liable to experience export recovery.

The second leads to domestically exposed firms at present prejudiced in their hopes.

The third amounts to an IT play on any sort of rubbish that has tomorrow's story to cash in on today.

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