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Dollar Up Against Euro - 2001-10-26

The European Central Bank Thursday left short-term interest rates unchanged despite clear signs of slowdown in the European economy. The euro is near a six-week low against the dollar.

Since January 1, the ECB has cut interest rates three times, reducing the cost of borrowing by one percentage point. By contrast, the U.S. Federal Reserve has cut rates nine times by a combined four percentage points. Short-term rates in Europe are 3.75 percent. In the United States, they are significantly lower, 2.5 percent.

Yet, despite the widening interest rate differentials, with more generous returns in Europe, the euro is trading at below 90 cents to the dollar, near a six-week low.

Harvey Rosenblum is the director of research at the Federal Reserve Bank of Dallas, Texas. He is also president of the National Association of Business Economics. Mr. Rosenblum explains the dollar's strength, saying investors apparently believe the U.S. economy will recover from the current slowdown faster than Europe's.

"Essentially what the world financial markets are saying is the U.S. economy in the long run is going to remain fairly healthy compared to other economies. There is going to be a lot of economic stimulus coming down the pike to assure that. While other economies may not have as much leeway for monetary and fiscal stimulus," said Mr. Rosenblum.

The United States is nearing approval of a $100-billion economic stimulus package. The U.S. currently has a budget surplus, meaning that extra government spending is possible without financial disruption. By contrast, most of the 12 euro-zone economies are constrained by having budget deficits near the limits set by the European Central Bank.

The 12 euro-zone countries will introduce euro notes and coins on January first.