The most interesting news for the week centered around the currency markets — specifically, a drop in the U.S. dollar, a vote on the euro in Sweden and the ongoing saga of the Chinese yuan. While U.S. stock markets declined slightly for the week, the more interesting drop came in the currency markets, where the dollar fell against most major currencies. For the week, the dollar dropped from 97.09 to 96.01 on the Finex global spot index. It lost 2.8 percent against the euro, and has fallen 3 percent since Sept. 3, when it was at a five-month high against the euro. Questions about the robustness of the U.S. recovery are making the greenback more erratic. Topping the list of concerns is the fact that strong signs of growth have yet to translate into any significant hiring: The weekly U.S. Labor Department report on Sept. 11 again failed to show any job growth, instead registering a gain in filings for state jobless benefits. Some other questionable news followed Sept. 12, including a disappointing August retail sales report showing growth of 0.6 percent — normally a healthy figure but uninspiring compared to analyst expectations and the gaudy 1.3 percent growth from July. Also that day, the preliminary reading from the University of Michigan's September consumer sentiment survey fell to 88.2 from 89.3. The dollar drop may also reflect concerns among currency watchers about a rising U.S. budget deficit and its impact on expanding the current account deficit. Large current account deficits historically make a currency more vulnerable to sharp depreciations. While foreign appetite for U.S. assets is still healthy — sustaining demand for dollars — currency speculators worried about the deficit may have begun betting against the dollar. It is telling that the dollar's slide against the euro beginning on Sept. 3 corresponded roughly with the announcement of a much-expanded U.S. budget request for Iraq and outcries over the deficit. The short-term implications for the dollar's decline were felt most strongly in European markets, which were down broadly for the week. This was partly in response to the mixed economic news out of the United States, but the decline against the euro was clearly adding to Europe's economic worries. A weaker dollar makes European exports more expensive for U.S. consumers and was likely a major factor in the broad weekly declines across the continent. The Dow Jones Stoxx Pan-European index fell around 2 percent, a figure replicated in major European markets from Paris to Frankfurt to Madrid. The biggest loser was Finland. Helsinki's HEX index dumped 4.7 percent for the week, thanks to Nokia's Sept. 9 announcement that the falling dollar was cutting into sales of the world's largest mobile phone maker. Nokia's stock did even worse than the HEX, falling 7.4 percent for the week and underscoring corporate Europe's vulnerability to currency appreciation and the European market's reliance on the U.S. consumer. Speaking of currencies and Scandinavia (how often does that happen?) exit polls in Sweden released late Sept. 14 indicate that the referendum to adopt the euro failed, though by a smaller margin than many late polls predicted. The closer margin was likely due to a marginal sympathy vote for Swedish Foreign Minister Anna Lindh, the popular pro-euro campaigner assassinated earlier in the week. Sweden's apparent rejection of the euro should have limited short-term impact
on the European and Swedish stock markets — as well as on the Swedish krona and the euro — as markets had already anticipated and priced in a rejection. In fact, the Swedish stock market might get a minor boost from the rejection, as some investors feared approval of the euro would drive up the krona, making Swedish exports more costly. Big exporters like Ericsson and Electrolux might see a boost early in the week on expectations that they will perform better in the near term with Sweden remaining outside the eurozone. In the longer term, however, the Swedish rejection throws into doubt just how much further the euro experiment will extend. British Prime Minister Tony Blair and his fellow euro champions in the United Kingdom — and to a lesser extent those in Denmark — were hoping that a positive Swedish vote would give their own floundering efforts fresh momentum. A politically weakened Blair is in a worse position than ever to take on the controversial issue, and the moribund eurozone economy — which is being outperformed by both Sweden and Britain — is doing them no favors. The Swedish rejection, combined with flagging European budgetary discipline and the weak eurozone economy, will sour the mood surrounding the euro even further. Back to the dollar: In Japan, rather than weakening as it did against the euro, the U.S. currency actually strengthened against the yen for the week, with one dollar buying 117.38 yen on Sept. 12 versus 116.48 yen five days earlier. The reason appears to be massive currency intervention by the Bank of Japan, which may have spent as much as $10 billion over that period to keep the dollar from falling to the 115 level thought to be the pain threshold for many Japanese exporters, Barron's reported in its Sept. 15 issue. With all the political hubbub now surrounding China's currency peg and the perceived under-valuation of the yuan, Japan remains much more active in manipulating the currency markets. Through the first seven months of the year, Japan spent an estimated $80 billion in currency intervention. Even so, Washington's ire has been saved mainly for Beijing, with only soft, low-key reminders to Tokyo not to go too far. The demonizing of Beijing
and its currency peg in Washington is as much a political as an economic issue. The White House is adopting a defensive strategy aimed at two main groups: big business, which has suddenly focused intently on the issue, and organized labor, which (along with the Democrats) is ready to pounce on the Bush administration for failing to create jobs. Lecturing China shows manufacturers that the White House is responsive to their concerns over export competitiveness, while allowing the Bush administration to deflect criticism over the lack of jobs. China is now playing the foil in global trade, a role held by Japan in the 1980s and early 1990s. That's great news for Tokyo, which has to keep the yen from appreciating if it hopes to keep any positive economic momentum and build on a strong second quarter of 3.9 percent growth. If Washington's focus remains on Beijing, that should be easier for Tokyo to continue intervening, printing more paper when necessary to purchase more dollars and keep the yen from appreciating. That, in turn, will keep Japanese exports flowing and the stock market stable. One more note about Asia. Singapore's stock market dropped 2.6 percent on Sept. 9 when the country confirmed the first new case of SARS since May. It turns out the patient works in a laboratory investigating the disease, and there is scant evidence that SARS is making any kind of comeback. Nevertheless, the report and the immediate impact on Asian markets is a reminder that the disease remains a threat to public and financial health in southeast Asia. The World Health Organization has been warning that SARS could make a comeback, and should new cases begin to emerge as Asia moves into the sniffly winter, markets will remember the economic havoc wrought in spring 2003 and will quickly dump vulnerable stocks, starting with the airline and travel industries. The region is undoubtedly better prepared to deal with any new outbreak, at least from a public health perspective. However, it remains to be seen whether investors are better prepared to ride out another outbreak.