[Dan]

Despite the concern expressed by many European officials on euro strength and the lack thereof until recently by Japanese officials, the nature of their economies suggests the opposite. The euro’s rally from 1.25 to almost 1.51 was accompanied by an increase in euro zone equity prices of 57%, so much of the currency impact on the economy is probably being offset by much more positive animal spirits. By contrast the Japanese equity market has had a 36% rally and the JPY’s rallies tend to be correlated with market pessimism rather than optimism. Typical JPY rally reflects a pullback in global animal spirits so the yen strength is doubly painful. In some ways these correlations are much more favorable over the business cycle for the currencies that have a positive correlation with risk appetite than for those that have a negative correlation.