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The Dollar Is Toast

Rubin and Summers aren't telling the truth when they shrug off the euro.

Editor's Note: With this column, we introduce Barbara Rockefeller, who has refined her approach to predicting currency trends for more than 20 years, including stints at Brown Brothers Harriman, European American Bank and most recently as a risk manager at Citibank's investment banking group. Look for Rockefeller's periodic forecasts on global currency trends on

. As always, please let us know what you think.

The euro was launched this week with much puffing-out of chests and shouts of triumph that political union is in sight, despite the fact that the Dutch finance minister got a couple of pies in the face.

Wim Duisenberg

, president of the

European Central Bank

, said he was happy when the euro rose, happy when it fell and happy when it rose again. "I've been happy for three days," he said. It is probably true, as he stated, that the ECB did not intervene this week. But make no mistake: It has a bias in favor of jiggering monetary policy over intervening to move the currency -- and it won't be shy about intervention if the euro gets too strong or too weak.

Most observers predict the euro will rise to $1.19 to $1.20 from the launch rate of $1.16675, but anything more than that could bring out the ECB's checkbook as it pretends to conduct reserve adjustments. Similarly, a level below $1.1350 could inspire support. This number is a Fibonacci target and also has the right gut feel. Technicians are using a synthetic euro historical data series constructed out of the old ECU with the pound and other nonparticipants stripped out. But truth be told, such an animal never existed, was never traded and doesn't behave like the euro will behave. Technicians are really flying blind.

That's why fundamentals are a better guide at the moment. Here we have two opposing forces: falling interest rates and portfolio shifts. All forecasts from the


, the "Five Wise Men" and the research institutes indicate Europe will have far less growth this year than 1998's 2.8%. The


institute puts German GDP at only 1.4% in 1999.

Europe tried to convince itself last year that it was immune from the Asia crisis, but it's now beginning to admit that exports -- the one remaining robust sector -- are threatened by the loss of Asian and Russian markets. Moreover, Euroland's inflation rate is a mere 1% and falling. Inflation is probably negative in Germany, which claims 0.4% but has confessed that the number overstates inflation. Money supply is nicely within the target band. In short, all conditions point to an easing of Euroland short-term rates any minute, despite Duisenberg's latest remark that ECB monetary policy is neutral.

A "strong" euro, defined as the rate that inhibits exports, would be tamed by a 20- to 25-basis-point cut to 2.75% to 2.80%. Normally a rate cut will weaken a currency. But if -- and only if -- other countries do not follow suit, it is the short-term rate


that matters. Since the


and the

Bank of England

are both poised for their own rate cuts, an ECB cut may have little meaning in the end for the euro.

Meanwhile, portfolio managers are lining up around the block to get some of the new currency, maybe as much as $1 trillion over the upcoming year.

Japan has already more than tripled its investment in French and German bonds, from 992.9 billion yen in 1997 to 3.697 trillion yen in 1998, and some 50% to 70% of net new Japanese investment will flow to the euro. This implies a whopping $5 billion to $7 billion per month shift from the U.S. dollar to the euro.

Further, China has already said it plans to diversify its foreign exchange reserves out of dollars into the euro. It claims to have $144 billion socked away, of which perhaps $50 billion to $75 billion would be dumped. The amount is not big in the grand scheme of things, but the "announcement effect" will be monstrous -- even though we have been warned. Malaysia, Indonesia and others will be glad to follow suit.




are not telling the truth when they shrug off the euro with the comment that anything that's good for Europe is good for us all. The U.S. may have a budget surplus at the moment, but the current account deficit will soon reach $300 billion. That means we have a lot of Treasuries to sell to pay for it.

Europe's reserve management will change, too, trending away from the dollar. National central banks have just lost most of their

raison d'etre

and are taking lessons in how to become portfolio managers. They are sure to dump gold, whatever their protestations now, and reallocate their remaining reserves. One estimate says they will dump about $250 billion in U.S. Treasuries, again not a large amount in the $6 trillion U.S. market -- but packing a wallop.

What might they buy instead? Well, Japan wants to boost the internationalization of the yen. The latest stimulus package puts Japan dead last in the


sovereign debt league, with total debt more than 10% of GDP and rising as the graying of the population progresses. (In contrast, Euroland's debt/GDP maximum is 3%.) Ratings agencies have already downgraded Japan because of this looming debt burden, and the yield on the Japanese benchmark 10-year bond has tripled from 0.64% last September to 1.80% this week. More is in store.

Finally, the yen is trending stronger, and we may see a replay of 1995, when yen/dollar rose to 80 and downtown Tokyo was priced at twice the rate per square foot as California. The Japanese like the trend because it may encourage the yen's role as a transaction and reserve currency, especially in Asia, but they hate it because it kills exports.

It is also irrational given the endless recession, but never mind -- currencies can be overvalued for long periods of time. The dollar is not going to be one of them, superior economy notwithstanding. As the dollar tanks, European stock markets are going to look even better.

Barbara Rockefeller is the principal behind Rockefeller Treasury Services, a Stamford, Conn.-based independent research firm specializing in foreign exchange forecasting and best-practices currency management. Through proprietary modeling systems which identify trends, RTS has successfully advised major multinational corporations and global fund managers since its inception in 1991. At the time of publication, she held no positions in the currencies or instruments discussed in this column, although positions can change at any time. She can be reached at her investing

Web site or via email at

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