Danish Krone

Over the year ahead, the Danish krone is projected to strengthen against the U.S. dollar in tandem with the euro to which it is linked within a 2.5 percent band around its central rate of 7.46038 to the euro. While the Danish electorate rejected membership of the EMU on Sept. 28, 2000, that decision is eventually expected to be reversed. In the wake of that vote, the central bank effected a 50 basis point hike to bolster the krone, but subsequently favorable economic numbers have permitted the Bank of Denmark to cut interest rate five times. Looking ahead, the numbers are forecast to be even more favorable with real GDP accelerating the 2.4 percent, especially supported by private consumption and fixed investment, while inflation surprisingly falls to 1.8 percent at the CPI level and 2.2 percent at the PPI level. Moreover, despite the strong growth, which will reduce unemployment to 5 percent, the current account surplus is actually expected to widen somewhat to $2.9 billion on the basis of a much larger merchandise trade surplus, especially agricultural exports.

British Sterling

In the twelve months ahead, the British pound is projected to strengthen around 4 percent to the $1.51 level, ($1.49 by year-end) despite its current overvaluation, due to a superior economic performance relative to the United States. Concurrently, it will continue to be steady at 1.60 euro (3.13 DM). In particular, the impact of the World Trade Center attack is expected to be modest, although the pound received something of a boost from the Monetary Policy Committee only cutting rates half of the Fed's 50 basis point cut. Subsequently, the MPC cut rates another 25 basis points to a 36- year low of 4.5 percent, and a final December cut is likely as well. Some of the favorable numbers include economic growth slightly accelerating to a downwardly revised 2.2 percent, led by a jump in Industrial Production to 4.5 percent, and some increase in long and short term interest rates. Conversely, the CPI will deteriorate to the 2.6 percent level, weakened by an even much greater acceleration in wholesale prices, and the trade and current account deficits will markedly deteriorate, $10 billion in case of the trade balance and more than $5 billion dollars in the incase of the related current account. A major issue is, naturally, the timing of the entry of the UK into the EMU. DRI-WEFA's (Eddystone, Pa) economists assign a 20 percent probability over the next four years and 40 percent for the next window of entry, which will be 2007-2008-the probable rate would be 1.45 euro (2.83 DM), a cheaper pound with inflationary implications.

Eurozone Euro

In the 52-week forecast horizon, the euro is projected to moderately strengthen against the U.S. dollar, including 95 cents by year-end on the basis of a superior economic performance and a reversal of investment flows. The impact of the World Trade Center attack is expected to be modest, although uncertainty is higher, as the European Central Bank in Frankfurt and the Fed made equal 50 basis point cuts to sustain their economies in the context of the uncertainties raised by the attacks. The favorable economic numbers include real GDP accelerating to 2.6 percent, while inflation slows at the CPI level to 2.9 percent (above the ECB target rate of 2.0 percent, but down from May's 8 year peak of 3.4 percent) and the WPI level to 1.1 percent, and finally a widening trade surplus of $77 billion will provide for a doubling of the current account surplus to more than $7 billion. With reference to the reversal of investment flows, the Eurozone recorded a net inflow of 19.8 billion euro in combined direct and portfolio flows last summer. Risks to the favorable forecast include a sustained spike in oil prices, to which Europe is more vulnerable than the U.S. which produces nearly half of its oil needs, and a marked weakening in the U.S. dollar in conjunction with severe economic weakness, which would markedly reduce the Eurozone exports to the U.S. Such a scenario for the U.S. dollar is not that unlikely since it is significantly overvalued, there is a disturbingly large current account deficit, and American manufacturers are lobbying the White House for a more competitive dollar. Separately, the institutionalization of the euro will be advanced in January when notes and coins will be introduced.