Gripes fail to halt dollar

MARKETS: ECONOMICS - THE WEEK REVIEWED

Investors spent much of last week listening to policy-makers grumble about the dire implications of dollar strength. The complaints - an effort to stem the US currency's rise without actually intervening - didn't work.

Bundesbank Vice President Johann Gaddum warned that the dollar's rise concerned Germany because it could drive up import prices and fuel domestic inflation. Gaddum went on to urge other central banks to collaborate to counter what he called "volatility".

The dollar dipped on the comments and then recovered. Against the mark, it closed the week near the 33-month high of 1.6931. Against the yen, it closed not far off a four-year high of 124.82. The expectation is that it will go higher still - unless European and Asian central bankers put their money where their mouth is and sell dollars to stem the currency's rise.

n In the US, reports showing a surprise drop in producer prices and factory output, and the largest jump in US productivity in three years, added to the general euphoria there. The reports made it unlikely the Federal Reserve will have to raise interest rates soon to keep a lid on inflation.

The US Labor Department's producer price index, which tracks prices paid to factories, farmers and other producers, fell 0.3 percent in January - the first decrease since October '94. The index's core rate, which excludes food and energy costs, was unchanged from a month earlier.

"The number is exactly what everybody, including Greenspan, has been hoping for," said Tony Riley, an economist at A Garry Shilling in New Jersey.

Separately on Friday, the Fed said output at US factories, farms and utilities was unchanged in January from December, restrained in part by weak production of household appliances.

Earlier, the US said worker productivity during the fourth quarter rose a larger-than-expected 2.2 per cent, the best showing since 1993.

n In the UK, meanwhile, investors looking for confirmation that the economy is enjoying a US-like "Cinderella cycle," with slow inflation, low interest rates and moderate growth, weren't disappointed by economic figures released in London last week.

While the reports failed to provide incontrovertible proof that inflation is slowing in Britain - the main inflation rate remained above target and wages rose - a pound-induced drop in producer prices and moderate growth in retail sales allowed investors to remain optimistic about the short-term outlook.

The reports are likely to permit Chancellor of the Exchequer Kenneth Clarke to resist central bank pressure and continue to postpone - perhaps until after the general election - what was once considered an unavoidable rate increase.

n In Japan, the government said December current account surplus shrank for the 28th time in 30 months, partly because the dollar's strength pushed import prices higher.

n In Germany, a report showing falling retail sales confirmed what investors already knew: domestic demand remains weak in Europe's biggest economy and growth is unlikely to pick up before spring. Copyright: IOS & Bloomberg