Outlook: Triple parity

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ALL MARKETS have a tendency to overshoot, both on the upside and downside, and no more so than with currencies, which sometimes stray an awfully long way from any level that can sensibly be justified by economic fundamentals. We appear to be in one of those phases right now.

There has been better than expected news about the Japanese economy, but even so Japanese interest rates and growth prospects remain relatively low. The strong yen will dim these prospects further. What Japan needs is not a strong currency, but a weaker one.

The US offers both rapid, new economy-style growth and high interest rates, so it is easier to see why dollar assets are attractive, despite the cavernous US balance of payments deficit. But then again, that trade gap means there is a risk of a sharp dollar depreciation, and if the hi- tech boom falters, there would be a rush for the door. Meanwhile, European policy-makers are right to point out that Euroland's growth prospects are bright and interest rates will probably climb further than US rates.

All the same, it seems unlikely that the markets will easily give up on the enticing prospect of reaching a triple parity - the one dollar euro, 100 yen dollar, and 100 yen euro. Nor does it seem likely that the currencies' momentum will go into reverse between now and the start of the new millennium.

An early year-end this year in case the computer bug causes any problems is one possible explanation for the renewed weakness of the euro. Some investors who put too much of their portfolio in the weakening euro and too little in the strengthening yen during 1999 are cutting their losses now so they can start the new year where they think they ought to have been.

In these circumstances, it would be foolish to make short-term predictions about when the markets might turn. But any further strengthening of the dollar and yen against the euro only further exaggerates an already anomalous position.