Over the past year the influence of information over transactions related to acquisitions and price trends in stock markets to movements of exchange rates has grown much more apparent. Lets take the Japanese example : The Central Bank of Japan kept interest rates near zero for more than a year hoping to revive the economy. It would seem that lower rates were required to work in favor of deteriorating the currency rates. But instead, starting May last year the Japanese currency has strengthened itself starting from 124 down to current 109 yen per dollar.
Traders ignored the low Japanese rates and focus instead on the news about the acquisition of Japanese companies and share prices. Traders liked what they heard : the Renault company bought 35% of Nissan, GE Capital also grabbed their Japanese assets, and the British “Britain Cable & Wireless“ acquired a Japanese telecommunications company. Foreigners have gained control of Japanese companies in record levels, and for them to implement their projects, they had to exchange their dollars, euros and pounds for yen. In parallel to this process, the portfolio investors from the United States and Western Europe had been buying Japanese stocks, betting that the long period of reforming of the Japanese economy will finally lead to an increase in corporate profits. Thus, the net capital inflow to Japan last year amounted to 95 billion dollars, citing the yen at its current, more expensive levels, and pushing the Nikkei stock market index by about 40% up compared to January 1999. In case with Euro, investors were concentrated on studying the information of the same character, but the effect of its interpretation was quite the opposite. Jim O’Neill of Goldman, Sach & Co. thinks that the culprit 17% of the fall of the Euro compared to dollar last year was just a new type of game on the Forex market, which had monitored and studied information on capital flows. When in early 1999 a joint European currency has only started up, the many “gurus of foreign exchange market” talked with high enthusiasm about the Euro as “a new reserve currency.” However those who had bet on Euro, had soon appeared broke. These players did not realize that both investors and even company executives in the Old World were not optimistic about the availability of sufficient conditions for business growth in their own region.
Japan and the U.S were much more attractive both for acquisitions and for portfolio investment. Therefore, while the positive balance of payments of the Eurozone was 60 billion U.S. dollars, European companies had spent more than $ 120 billion for merging activities with Japanese and American companies, not including other types of straight investments into the investing countries. Another 60 to $ 70 billion had flown from the Western financial markets in pursuit of higher profits in the financial markets of the U.S. and Japan. Subsequently, there were only the money left in Europe that, quoting Jim O’Neill, “people were to return to their banks for the limits overdrawn from their credit cards.”
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