Final short view By Philip Coggan - The new conundrum

Final short view By Philip Coggan
Copyright The Financial Times Limited 2006
Published: September 1 2006 03:00 | Last updated: September 1 2006 03:00


Who would be a financial pundit? Investors could take their pick from a welter of economic statistics yesterday and use them to justify any number of views on asset prices.

Europe was rich in data, with sharp declines in German retail sales and Italian business confidence looking negative for economic growth prospects, while a fall in French unemployment was positive.

European economic growth was strong in the second quarter but many commentators are nervous about whether this can be sustained in the second half of the year. And the European Central Bank made clear in its press conference yesterday, with its mention of "strong vigilance" over inflation, that monetary policy would soon be tightened again.

The problem with reacting to individual items of economic news is that much of it is "noise", subject to random fluctuations and likely to be revised in subsequent months. Capital Economics made that point about the 0.9 per cent July fall in Japanese industrial production, reminding investors it followed a sharp 2.1 per cent increase in June.

Nevertheless, it seems clear that the balance of Japanese economic data in recent weeks has been disappointing.

That has prompted investors to scale down their expectations for the speed of Japanese interest rate increases, and led the yen to fall to a record low against the euro and eight-year lows against sterling and the Swiss franc.

The currency markets continue to be a battle between the weaklings. There are good reasons to sell each of the three main currencies; the yen's lack of yield; doubts about the long-term growth prospects for Europe; and the massive US current account deficit.

But there is no sign yet of the great dollar crisis that those most concerned about the US deficit have been forecasting. Perhaps this is because none of the alternative currencies is sufficiently attractive to trigger a stampede out of US assets.

There is always gold, which is up 20 per cent since the start of the year. But gold is also $100 an ounce below its May peak. That does not suggest investors have any immediate desire to bid paper currencies goodbye.