January 9, 1999

Euro's First Week Goes Smoothly

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    FRANKFURT -- Except for a few minor procedural glitches, the euro finished its first week as Europe's new single currency with remarkable smoothness.

    "Almost boring, really," remarked James O'Neill, currency strategist at Goldman, Sachs in London. "For all the great excitement that built up ahead of the euro, it turned out to be a little bit of a damp squid."

    But that was just fine for the central bankers and political leaders who launched the euro on New Year's Day. If the euro did not jump in value, as some had hoped, it did not fall much either.

    And by Friday, traders were confident that the overwhelming technical conversion of computers and trading systems had indeed been a success. The electronic settlement systems that clear transactions between banks, brokerage firms and institutional investors were generally proceeding properly.

    After jumping modestly against the dollar and most other currencies on Monday, the euro slipped and ended the week slightly below its starting price against the dollar -- $1.15540 vs. $1.16675.

    Those movements seemed within the range expected by Wim Duisenberg, president of the European Central Bank. In the days leading up to the euro's launch, European currencies showed signs of being uncomfortably strong against the dollar, which raised concerns that European exports might weaken if they became too expensive.

    After a meeting of the bank's governing council on Thursday, Duisenberg made it clear he was pleased with the euro and saw no need to cut interest rates to bring down its value.

    "We don't see any tendencies that could force us to change rates," Duisenberg said. "There is no bias any longer in any direction."

    European stock markets climbed sharply, finishing the week about 8 percent higher than they had started. Optimism about the euro, and relief at a seemingly smooth launch, provided part of the reason.

    "The only real surprise was the strength of the European stock markets," said David Bowers, an equity strategist for Merrill Lynch in London.

    Blue-chip European stocks were among the biggest winners as institutional investors began lining up their portfolios with Europe-wide stock indices.

    At the moment, at least three Europe-wide stock indices are in competition as standard reference points. Those are the Dow Jones EuroStoxx 50, the Financial Times' FTSE International and the Morgan Stanley Capital International indices.

    In a study by Merrill Lynch, the 28 stocks listed on all three of those charts outperformed the broader indices by about two percentage points.

    "The move into blue-chip stocks is clearly one of the consequences of the euro," said Joachim Fels, senior economist at Morgan Stanley. "Most of the investors are now targeting euroland benchmarks."

    Investors remained cautious throughout the week, with trading volumes still low in both currency markets and stock markets.

    But analysts and traders reported few technical problems, none of them major. Some banks had trouble settling money transfers. Peter Wolf-Koeppen, head of Commerzbank's euro conversion efforts in Frankfurt, said some banks had not clearly specified to their counterparts the specific method, among several possibilities, they wanted to use for settling transfers.

    There are several systems for clearing interbank transfers. The European Central Bank has established a new clearing system called Target. But banks can also use a system set up by the European Banking Association as well as a third system in Frankfurt that has long been used by German banks and their counterparts.

    Duisenberg called these minor glitches "teething troubles."

    The bigger question will be how the European Central Bank and European governments come to grips with the divergent economic problems around the Continent.

    Germany, which accounts for about one-quarter of the euro-zone's economic output, is getting more bad news every day. Germany's double-digit unemployment, which had finally begun to decline slightly, jumped from 10.2 to 10.9 in December.

    Meanwhile, many economists have slashed their forecasts for economic growth from nearly 3 percent in 1998 to less than 2 percent in 1999. The Deutsche Institute fur Wirtschaft, one of the independent economic research organizations that advise the German government, cut its prediction this week to just 1.4 percent.

    Under other circumstances, that might prompt central bankers to cut interest rates and inject more money into the economy. But countries such as Ireland, Spain, Portugal and Finland are all growing at much faster rates. For those countries, an additional rate cut could re-ignite inflationary pressures.

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