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Markets & Stocks
Strong dollar policy stays
January 2, 2001: 6:26 a.m. ET

Treasury Secretary-designate O'Neill expected to extend current policy
By Gordon Platt
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NEW YORK (CNNfn) - Market participants are waiting anxiously to see if the incoming Bush administration will continue the strong-dollar policy followed by the Clinton team.

The nervousness stems in part from the fact that Treasury Secretary-designate Paul O'Neill, who is credited with turning Alcoa around, knows that a weak dollar can benefit U.S. companies seeking to boost exports, analysts said.

Washington insiders were surprised with President-elect Bush's selection of O'Neill for the top Treasury post because the Alcoa executive came  neither from Wall Street nor from academia, as did his two predecessors Robert Rubin and Lawrence Summers.

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  It may be difficult for the dollar to sustain the overbought levels it reached against the euro in the past year. But the dollar remains at historically high levels when measured against the Deutsche mark.  
     
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  Bob Lynch
Currency strategist
BNP Paribas
 
"Little is known about O'Neill's views on key policy issues such as the dollar and the proposed tax cut," said David Gilmore, economist and partner at Foreign Exchange Analytics, Essex, Conn.

"What we do know is somewhat reassuring, even if there are significant gaps in his international economic policy resume," Gilmore said.

Not only is O'Neill a successful international businessman, but he brings with him organizational skills that surpass those of any recent treasury secretary, Gilmore added.

O'Neill is also a confidant of Federal Reserve Chairman Alan Greenspan, as well as Vice President-elect Dick Cheney, and the markets should be   assured of a strong working relationship between the Treasury and the Fed, analysts said.

What's more, George W. Bush's chief economic adviser, Lawrence Lindsey, has firm views on international and domestic economic policy. "Lindsey will assure the strong-dollar policy is intact, even if O'Neill from a business standpoint at Alcoa knows the benefits of a weak dollar," Gilmore said.

Nonetheless, analysts said the financial markets are eager to hear directly from O'Neill on key policy questions, particularly where he stands on dollar policy.

The dollar already has fallen to a five-month low against the once-lowly euro, as the U.S. economy continues to slow. An ongoing slide in the dollar could make it more difficult for the United States to finance its gaping current account deficit, making the Fed reluctant to cut interest rates.

"It may be difficult for the dollar to sustain the overbought levels it reached against the euro in the past year," said Bob Lynch, currency strategist at BNP Paribas. "But the dollar remains at historically high levels when measured against the Deutsche mark," he said.

Analysts at Merrill Lynch said the recent reversal in the dollar is unlikely to extend much further. They said the prospect of Fed easing helps to reduce the risks of a hard landing for the U.S. economy and will underpin global investor holdings in U.S. financial assets.

The Japanese yen, meanwhile, is expected to be the weakest of the major currencies in 2001, reflecting a slowdown in the Japanese economy, worries about a credit crunch, and persistent downward pressure on the Japanese stock market, analysts said.

"The yen continues to weaken, as it should, given the continued weak economic data coming from Tokyo," said Dennis Gartman, editor and publisher of The Gartman Letter.

"Industrial production for November was a horrible figure indeed," Gartman said. While industrial output was expected to rise modestly, it actually fell 0.8 percent, he noted.

The spokespeople at the Ministry of International Trade and Industry tried to dissuade the market from taking an overly bearish view of the number, Gartman said. But Japanese officials have been touting the prospects for better growth in the future for the past 10 years, he added, and no one is paying attention to them any longer.

Japan reported that its unemployment rate for November rose to a record high, while spending by households fell by 2.1 percent.

The yen has weakened to its lowest levels in more than a year, despite signs of slowing U.S. economic growth. Investors are concerned that a hard landing by the U.S. economy would further weaken Japanese exports, and prove to be the final straw breaking the back of the Japanese expansion, said analysts at Chase Securities.

However, at this point, they added, further yen losses likely will be limited. The expected easing of U.S. monetary policy should lead to a revival of U.S. growth in the second half of 2001 and will also calm some of the financial fears in the Asia-Pacific region, they said.

-- Gordon Platt is a freelance columnist writing about currency markets for CNNfn.com. graphic

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Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.