The euro is set to appreciate further this week as expectations mount that the Fed will soon cut interest rates.
The euro is benefiting from a weakening dollar as concerns that the US may be heading for a harder landing increase. The US Federal Reserve's open market committee is meeting tomorrow to decide on whether to cut interest rates.
Most analyst expect a statement outlining its concerns for growth but no actual cut until the next meeting at the end of January.
Senior Fed figures have recently implied that such a statement will probably be forthcoming. Chairman Mr Alan Greenspan and his colleagues have made it abundantly clear that they now regard a sharp slowdown in growth as at least as big a risk to the economy as an inflationary overheating.
That is the first step to cutting interest rates from their current level of 6.5 per cent. According to Mr Jim Power, director of investment at Friends First, the next step is to issue a statement sending a strong signal it will contemplate cutting rates in January. "The Fed will be weighing up the risks. It is likely to lean towards a belief that the risks of a hard landing are becoming stronger while the risks of inflation growing are weakening."
He added that tomorrow is probably too soon for a rate cut. The central bankers will want to wait and see some more data to confirm the seriousness of the problem. But even that will be enough to strengthen the euro which will trade between $0.90 and $0.95 between now and into January, he said.
The meeting comes as evidence mounts that the economy has slowed dramatically from the almost worrying pace of earlier this year and last.
Industrial production, consumer confidence and spending all have fallen off sharply and equity markets have sold off dramatically since their highs of last winter. Meanwhile, the latest inflation readings have been relatively benign.
Earlier this month Mr Greenspan warned that "in an economy that already has lost some momentum, one must remain alert to the possibility that greater caution and weakening asset values in financial markets could signal or precipitate an excessive softening in household and business spending".
This meant that inflation has been overtaken as the major economic risk. Rapidly slowing growth is the new worry.
Most analysts now expect rate cuts next year - the only question is how many? The first cut is likely on January 30th or 31st at the next Fed meeting, just days after President-elect George W. Bush takes up office. He has already warned about his fears of an excessive economic slowdown. Mr Dick Cheney, the vice-President-elect, has even warned of an impending recession.
Most analysts think that is very unlikely. However in the new environment firms could become very cost conscious and according to Mr Power that will have to be watched very carefully here, particularly in the light of the postponement of the Intel development and the Motorola layoffs.
He also warned that equity markets are likely to continue to be very volatile.
