Foreign Exchange Market

Economies, like presidents, are far from bullet-proof

PUBLISHED : Sunday, 20 December, 1998, 12:00am
UPDATED : Sunday, 20 December, 1998, 12:00am

ANYONE looking at United States stocks recently will believe the country's economy is bullet-proof.

At the same time as US forces rain billions of dollars of death and destruction, in Congress the guardians of the nation's morals are going through the process of having the most powerful man in the world removed from office.

Overseas, emerging markets remain fragile. Brazil's Bovespa Index regained some ground on Friday having lost nearly two-thirds of its value in the past two weeks.

So just when you would expect US investors to look a little rattled, what happens? Up come the Dow Jones Industrial Average and S&P 500 Index for their first weekly gain in three weeks.

The Nasdaq Composite Index rose a further 2.07 per cent to a record high of 2,086.14 points.

The currency market seems to be a little more clued in. The dollar fell to 115.65 yen from 116.35 yen in late trade on Friday. That leaves the mighty greenback 11.4 per cent lower for the year.

It is also lower against the deutschemark, though by a more modest 7.5 per cent.

There may be some insight from the different reactions of the two markets.

United States analysts maintain the impeachment proceedings are of little interest to investors.

That is probably true - the proceedings have long since ceased to be of interest to the vast majority of the American people. And it is the investment revolution among the American people that is a significant force driving stocks higher.

In fact, the American people seem to have little interest in politics, full stop.

Two years ago the federal government in the US was forced to close because of another protracted and harmful row between the executive and the right-wing radicals in the legislature (on this occasion it was over the budget deficit).

At the time it was disturbing to see grown adults driving their families hundreds of miles to Yellowstone National Park or Alcatraz (both run by the federal government) completely unaware, only to find, surprise, surprise, the famous attractions closed.

Currency markets are, by contrast, that much more global. The US, shock, horror, cannot even claim to be the centre of the trade.

What markets hate to see is uncertainty. The vote on impeachment will not end the matter.

It will be followed by a trial, and during all this time the government will be in a state of paralysis - the accusations that the president is playing some kind of sick Wag The Dog game only goes to prove that.

Expect the US dollar to weaken as the presidency weakens. And expect the markets to continue climbing as the grip of American investors on reality weakens also.