EUROPE: History Shows Euro Rises in December

Global Finance, Dec 2003 by Platt, Gordon

While the euro's performance has been disappointing to its backers in recent weeks, analysts say there has not been a major shift in sentiment in favor of the US dollar.

Rapidly improving US economic data have contrasted with less-thanrobust numbers from the eurozone, prompting the unwinding of speculative positions that had helped to boost the euro, says Ashraf Laidi, chief currency analyst at MG Financial Group in New York.

He says the euro could soon bounce back, since the single currency has demonstrated a seasonal tendency to rise in December in every year since 1999.

What's more, as the European Central Bank's monetary policy shifts away from an easing stance into a more neutral positioning, money markets will price in an earlier rate increase in the eurozone than in the US, which should be supportive of the euro versus the dollar, Laidi says.

Strength should also reemerge in the British pound after market participants expect further Bank of England tightening and the central bank maintains its silent approval of the appreciating currency, he says.

From the looks of things, both the British and Australian interest rate hikes announced in early November could be the start of a series of increases in those countries, according to Carl B. Weinberg, chief economist at Valhalla, New York-based High Frequency Economics.

"For the first time in a long while, we think interest rate spreads will be a dominant factor in defining currency movements for the next few quarters," Weinberg says.

"We should be able to determine where rates are going to go highest the soonest, and we think this will be a good guide to relative currency moves," he says.

Both the UK and Australia have record low unemployment, economic growth in line with longterm trends and with prospects for acceleration, strong consumer demand and very strong housing markets, and excessive credit growth, he adds.

Any signs of recovery in the eurozone are so tepid that tighter money is an inconceivable choice, and no one is seriously thinking about higher interest rates in Japan, Weinberg says. And while the US Federal Reserve's next move will be a rate hike, the increase isn't likely before the second quarter of 2004, according to High Frequency Economies' chief US economist Ian Shepherdson.

Therefore, the British pound and the Australian dollar should be strong against most currencies, while the US dollar can be expected to rise against the euro and the yen, Weinberg says.