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Investment view

It is a little while since we have needed to factor in currency movements when assessing the relative attraction of markets. But, suddenly, the mighty greenback is not so popular and the mongrel money borne out of European Monetary Union is beginning to look as though it could show some form. Has the game changed for the world&#39s currencies?

Currencies are often viewed as the share price of a country. Just as a company&#39s shares may prosper if profits are rising, so a currency might perform well if the economy is prospering. Of course, it is not as simple as that but you can look back to the heady days of the industrial and commercial successes achieved by Germany and Japan and match with that the strength of the Deutschmark and the yen.

Currencies are really about capital flows. If more people wish to buy dollars for investment or business reasons, then the dollar will rise. Sterling has held up remarkably well over recent years because of inward investment into the UK. We have been seen as an easy springboard into Europe for foreign businesses so the pound has been in demand.

In the US, a trade deficit that might have been expected to act as a brake on the dollar has been more than counterbalanced by a view that US bonds are a safe haven during difficult times. Also, until recently at least, the knowledge that US companies led the world in such cutting edge industries as information technology has created demand for US shares. But the dollar is weakening and money has been flowing into the euro as the only real alternative for international investors.

One peculiar thing about plotting currencies is that technical analysis appears to work better in this market than anywhere else. The charts are suggesting there has been a fundamental shift in the relationship between the euro and the dollar. It may not be a straight line move but it looks as though we could once again see the euro testing the recent high of around 95 cents. The fundamentals hardly support it, though.

The euro came into being at the beginning of 1999 and traded at around $1.17. The decline started almost immediately. By the end of the year, it was barely over parity with the dollar and the start of the new millennium saw the bear market in the single European currency intensify, falling to below 85 cents close to the end of the year. Bouncing from this oversold position brought it to over 95 cents by the beginning of 2001 but the 85 cent resistance level was tested again and it has only been since the early weeks of 2002 that we have started to see any sustained recovery.

The background is one of continuing economic weakness within the eurozone while the US economy has shown itself to be remarkably resilient in the face of the collapse of the technology boom and the terrorist attacks last September. The recession has been remarkably shallow but there remains the problem that US industry is still not investing.

In Europe, the news has hardly been cheering, with the political map looking unsettled as the far right gains more publicity and support, notwithstanding the resounding defeat of Le Pen in the French presidential elections. More worrying is the attitude of German unions, which seem determined to push for higher wages and block labour market reforms. This is the sort of situation that would send currency traders running for cover, yet the euro remains in demand.

It is probably the holidaymaker or prospective purchaser of a home abroad who should be most concerned over the relationship between the major currencies. Economists will continue to ponder what it all means but the chartists are holding sway at present. It is more agreeable to have a market where a relentless sideways move appears to have come to an end. Would that that would happen in the stockmarket.

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