U.S. Market January 4, 2001

Reaction to yesterday’s Federal Reserve rate cuts continued today in New York but in a more traditional vein than yesterday. Normally rate decreases by a central bank would drive a currency down against those of its trading partners, as investors receive a smaller return than was previously possible on currency denominated local investments--usually financial instruments or equities. Yesterday’s currency movement, especially the rise of the dollar against the euro, was an anomaly driven by two temporary factors: profit taking on long euro positions after the long two month rise and the vast relief rally in American equities. As traders in New York pondered Greenspan’s millennium surprise today, fear surfaced that if the chairman, long respected on Wall Street for his deliberate way with the markets, was willing to shock the markets with yesterday’s increase, then maybe Friday’s employment report will be considerably worse than expected. Or perhaps Mr. Greenspan is privy to other, more disturbing statistics, on the American economy. Both possibilities improve the relative position of the European economy versus the American, and strengthen the euro against the dollar. The euro was buoyant throughout the New York session, closing at 0.9475 and spending much of the time above 0.9450. If the United States GDP looks certain to weaken in coming months at least the markets see positive government action. In contrast, the Japanese government, which seems once again to be hoping for export led growth to end its decade long stagnation, appears to be bankrupt in both ideas and will. With its largest single export market, the United States, set to slow considerably in coming quarters the yen suffered measurably in today’s trading. Even though the euro/usd rose (and the usd sank) two figures over yesterday’s low the usd/jpy rose (and the dollar rose) an almost equal amount-two figures, closing the session at 115.60. In Japan, economic mismanagement looks stable indeed.

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