Brown Brothers Harriman Economists Preview Q2 Prospects For World Economy and Currency Markets.

Business Editors

NEW YORK--(BUSINESS WIRE)--April 10, 2000

Two themes dominated the economic scene in the Q1 of 2000: faster than expected economic growth, and rising inflationary pressures, according to Anne Mills, senior economist at Brown Brothers Harriman (BBH) Foreign Exchange.

"World central banks reacted by stepping up the pace of monetary tightening, and world equity markets reacted by turning extraordinarily volatile," said Mills. "We continue to expect a reversal in growth differentials between the U.S. and the rest of the world. However, this transition is not likely to be smooth."

In the meantime, Mills added, "currencies will track global capital flows rather than more traditional fundamentals. Until this situation reverses, the dollar will remain strong, once it does however, the implications are dollar negative."

The BBH FX Team also released more specific analysis including:

The U.S. Outlook

As the U.S. boom continues with no signs of slowing, more Fed tightening is a virtual certainty. But the Fed's attempt to ensure a soft landing puts the central bank, and markets, on a tightrope. Continued dollar strength will depend on stock market reaction to these tightenings.

Other Americas Outlook

Canada and Latin America have watched carefully as the Fed hikes rates, but sentiment remains strong. Even though growth in the region owes a lot to the U.S. expansion, most other countries in the hemisphere should remain internally healthy if and when U.S. growth slows. The Canadian dollar does not yet fully reflect this, whereas the Mexican peso has stretched into overvaluation.

The European Outlook

For the economy, it looks like run euro run, but the currency can't seem to get out of bed. If the new economy paradigm does indeed prevail, the euro may stay a sleeping beauty for some time. If not, we look for a move back to parity over the summer, with risks to the upside in the longer term.

The Japanese Outlook

The yen is often driven by capital flows that have little to do with Japanese economic performance. At present, for example, the yen is very strong despite a return to technical recession. The disconnect between the yen and the economy may well continue through the rest of the year, especially given the impact of Postal Savings redemptions on Japanese capital markets.

Other Asia/Pacific Outlook

Elsewhere in Asia recovery continues, but inflationary pressures and the world tightening cycle are putting pressure on central banks. All of this, plus keen foreign interest, will keep the upward pressure on regional currencies. The Australian and NZ dollars were big disappointments in Q1: we look to a short-term rebound but have grown more cautious long-term.

The Outlook for Currencies

Dollar/euro has become the bellwether for the FX markets, as dollar/euro continues to gain far beyond what the fundamentals would suggest. This is linked to the resilience in U.S equities prices, and like that resilience, looks increasingly vulnerable. We would not sell the dollar vs. the euro, however, until technicals turn constructive. More broadly, dollar performance has been a lot less impressive, and is likely to remain so. The yen, in particular, could gain further before midyear.

BBH Background

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