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Currency woes to shake US markets?

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Wall Street has something new to worry about: a weakening United States dollar.

"A weaker dollar will have a negative effect on the stock market," says Neil Williams, an analyst in London for Goldman Sachs, a major investment banking firm. He suspects the weaker dollar explains in part the decline in stock prices in New York.

The argument Mr. Williams and some other analysts make goes like this:

For years, the US has financed its growing trade deficit and a domestic shortfall in savings by borrowing abroad.

Foreigners were glad to oblige. The US economy and stock market were booming. They offered fine profits. Foreign companies invested heavily in US businesses.

Contrariwise, Japan's economy and market were in a dragged-out slump. Europe's economy was moving at a slow pace. Southeast Asia was in crisis.

But the scene is changing.

Japan's economy is picking up. Tokyo stock prices are rising rapidly. Europe is showing more vigor. Asia is recovering. And the US economy may be slowing.

Dollar investments are becoming "less attractive," notes Adam Posen, an economist with the Institute for International Economics in Washington.

Foreign investors had heavily overweighted their portfolios in American stocks and bonds. Now some are shifting funds out of the US to a brighter Japan, Europe, or elsewhere abroad.

This outflow will continue to weaken the dollar. Thus imports will cost more, adding to US inflation. Moreover, the weaker dollar will make it easier for US companies to export and compete with imports. That will boost US economic activity at a time when the Federal Reserve wants to see a slowdown.

"It's raising concerns at the Fed," figures Sal Guatieri, an economist in Toronto with the Bank of Montreal.

So, when Fed policymakers next meet Aug. 24, they will be tempted to raise interest rates in an antinflationary move. Or the outflow of funds will push up rates regardless as investment money gets scarcer in the US.

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