Magazine article Modern Trader

D-Mark Cross in Question, but Yen Holds Some Promise

Magazine article Modern Trader

D-Mark Cross in Question, but Yen Holds Some Promise

Article excerpt

Since Germany's reunification, concerns over inflation have driven the Deutsche mark. New Bundesbank President Helmut Schlesinger encounters high growth, rising prices and tax hikes, suggesting higher interest rates and tighter money.

Earl I. Johnson, foreign exchange economist at Harris Trust and Savings Bank in Chicago, says even a rate hike should not lower German inflation in the short run. But interest-rate and tax hikes should slow its economy. If the United States sees a moderate recovery and lower inflation, the mark could rise relative to the dollar even with a U.S. rate cut, he says.

Analysts say the Bundesbank's immediate task is to stimulate eastern Germany's economy (even though the central bank's charter gives it no such function). It is less concerned with showing a tight-money image to other Europeans planning a single currency directed largely by German policy.

"The Bundesbank faces a dilemma," says Yasuo Miki, chief dealer for Kyowa Saitama Bank in Chicago.

But traders, who see Schlesinger as a "hard-liner," expect him to continue solid monetary policies while maintaining stimulus to prevent political conflict. Economist Robert Dederick of Northern Trust in Chicago notes Schlesinger "has nothing to prove."

The Group of Seven's July report emphasizes macroeconomic and political factors over exchange-rate management. But the central banks, usually starting overseas, still intervene when markets get volatile. Nonetheless, Johnson says, such intervention has been around $1 billion or so in a $700 billion market. …

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