Europe Slows

The european economies may be nearing recession, as the European Union’s statistics agency said GDP for the second quarter contracted 0.2%, increasing the likelihood that interest rates will be lowered in the near future. The implications are that the dollar will continue to strengthen, potentially having a negative effect on one of the few brightspots of the US economy. Although the stronger dollar will increase the purchasing power of US consumers for goods imported from foreign countries, consumers are likely to restrain their spending until the housing and credit crisis subsides. So the likelihood that the stronger dollar will jumpstart consumer spending is minimal. But even worse, export growth, one of the largest contributors to GDP growth, will be driven down by a combination of lower demand from foreigners and higher prices in US dollar terms. It could hurt the US large caps that have fared so well with the weak dollar and expanding overseas markets.