FRANKFURT, Jan 28: The mark should modestly strengthen against the dollar ahead of European Monetary Union, but uncertainties about Bill Clinton's presidency may cause market turmoil, a survey showed on Wednesday.The survey of 28 European financial institutions showed a wide disparity of opinion about the mark and reflected a range of about 30 pfennigs between the highest and lowest forecasts against the dollar before the euro start on January 1, 1999.But the median survey results showed the dollar ending the 1998 first quarter at 1.82 marks, falling to 1.80 marks in the second and third quarters and trading at 1.75 marks at the end of 1998 ahead of the transition to the euro.
The mark will also catch up with sterling, with the survey showing a rate of 2.75 marks at the end of 1998 from the current level of about 2.97, while the mark will stay steady against the Japanese yen at about 71 yen per mark.
The survey was completed on January 21, the day when allegations of US president Bill Clinton having anaffair with a 24-year-old White House intern surfaced.The dollar was then trading at 1.81 marks but has since tumbled to about 1.7850 marks in Tuesday European dealings.
Economists said Clinton's fate will certainly remain a market factor for the coming weeks.
But they said the Asian financial crisis and its impact on the US and European economies is far more important and will re-emerge as the top market theme for forex dealers.Michael Claus, economist at CSFB in London, posted the highest level for the dollar at the end of the 1998 fourth quarter, seeing the dollar at 1.90 marks.
"I do not see an aggressive up move in the dollar but for it to remain at the high end due to persistent structural weaknesses in Europe that are not resolved," Claus said. "Restructurings will reduce private spending and the scope for rate hikes."Claus also contested the general notion that the United States was most vulnerable to take the blow from Asia. If he is right, this would help support the dollar's position.
"Wethink Europe could be similarly affected as the US," he said. "We also have concerns about European bank exposure."Claus saw "no big risks" ahead at the moment for the start of EMU, saying, "The big risk would be if a new recession undermines growth and EMU acceptance altogether."But others said expectations for the US economy to slow down due to the Asian financial crisis will boost the mark.
"We think the US economy is going to slow down in a big way," said Klaus Baader, economist at Lehman Brothers in London, who sees annual US growth rates in the second half of 1998 of about 1.7 to 1.8 per cent.Baader sees the dollar trading at 1.60 marks at the end of the 1998 fourth quarter, down from 1.77 marks at the end of the first quarter.He also said the Federal Reserve could trim the Fed funds rate to about five per cent through two separate 25-basis point cuts by the end of 1998."That's in contrast to Europe, where we see growth rates as expected at the end of 1997," Baader said, noting he expected 2.7 percent annual growth for Germany in 1998.
Another negative factor for the dollar is the US current account trend, which he said "will be truly awful" due to Asia.Ahead of the EMU start, the mark will get help from expectations for European three-month money market rates to reach about 4.25 per cent by the end of 1998 as part of EMU convergence efforts among nations selected in May.
Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.
