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Equity markets hope buck won't stop here

William Hanley

Financial Post, Daily edition, Thursday, February 13, 1997

If the U.S. buck fails to stop at its current elevated level and gathers even more strength, Wall Street and Bay Street are likely to cheer its rise.

A strong greenback is, in the short and medium terms at least, good news for North American stock and bond markets. Foreign investors seek the added real and currency gains that US$-based securities will provide.

Canadian markets benefit because the loonie moves in tandem with the US$ against foreign currencies.

Merrill Lynch & Co., in propounding the generally bullish US$ outlook on Wall Street, says G7 nations cannot do much to prevent the US$'s rise, despite stout words at the group's recent gathering in Berlin.

Merrill reckons the G7's policy options are limited because a further rise in the US$ can be prevented only by changing the differential interest rates. This would mean lower U.S. rates and higher rates in Germany and Japan. That cannot happen because of robust U.S. growth and frail recoveries in Europe and Japan.

Anyway, Merrill says, the G7 need not do anything because the gains against the German mark and the Japanese yen overstate the US$'s overall weighted average gain, and a strong greenback will be a great help in Europe and Japan and have little downside in the U.S.

So, even though the US$ has risen 8% against the yen and 9% against the mark so far this year, Merrill believes it could gain at least another 5% against these currencies this year.

As a result, North American bonds and stocks should continue to attract overseas buying.

The near-term inflationary danger of a strengthening US$ is minimal because imports, though on the rise, are cheaper. Nevertheless, a US$ that remains strong over a long period will continue to pump up the U.S. trade deficit. That means more borrowing abroad and the probability of higher interest rates to keep the lenders happy. That, over the long haul, would not be good for North American stocks and bonds.

Meantime, though, long green is the Street's favorite color.

Source: This information is provided by the Financial Post.

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