Ideally, the surging U.S. economy should help stimulate a European recovery. But over the short run, notes economist William V. Sullivan Jr. of Dean Witter Reynolds Inc., it may actually be acting as a depressant.
The explanation lies in the currency markets. In recent months, a strong surge in U.S. economic growth and upward pressure on domestic interest rates have caused the dollar to strengthen by almost 9.5% against the German mark, sparking fears of a rise in German inflation. As a result, the Bundesbank may well decide to delay cutting interest rates further. And such a decision, warns Sullivan, would tend to mute or defer a European recovery.