Last week: Despite the disappointing jobs report last week, the economy has a little more wind in its sails going into 2011. The positive report on retail sales suggests the consumer market had some holiday cheer. And the latest trade report suggested export growth remains a strong positive. There is no shortage of negative factors at present, starting with the continued problems in both residential and commercial real estate. Nevertheless, the overall economy is firmly on a positive path. And if the labor and/or housing market improves a little, the path could be even steeper.

THE SITUATION ABROAD

The global economy continues to reflect the split between strong performances in China, India, Germany, and a few other bright spots and the ongoing problems in some of the so-called periphery economies in the Euro-zone as well as in Japan. The net situation is one of improving trade conditions and still healing financial markets. Currencies continue to adjust, with the euro and yen showing surprising strength. How long will these particular currencies continue to enjoy a premium? A second big question is whether rising fuel or food prices will begin to bite into economic strength. These are some of the developing stories early in the new year.

FACT OF THE WEEK

$535. In 2008, the price of rice skyrocketed to $1000/ton before prices retreated. The price now is close to $535/ton and rising. Wheat prices are also climbing. In fact, prices of all grains could rise by 10 percent in China this year, after an increase of 11.7 percent last year. Meanwhile, the global price of crude oil is moving in the range of $90-to-95/bbl. Thus, the cost of producing, transporting, and cooking grains is rising even as the price of the grains themselves is rising much faster than other consumer goods.

QUESTION OF THE WEEK

Why is the euro so high, given all the problems over there?

Every exchange rate is bi-lateral. Therefore, it is affected by economic developments in either of the two economies. Euro holders (investors, corporate financial officers, and others) are willing to hold these relatively expensive euros even though they dislike them, but they dislike the dollar even more. Put another way, there are plenty of concerns about what could develop in Portugal, or Spain, or elsewhere in the euro-zone. But there are concerns about the strength of the U.S. economy, its housing market, its consumer market, investment market, and especially the labor market.

Market forces have allowed the euro to stay north over 1.3 in recent weeks. Perhaps, European concerns have dampened. Perhaps big questions about U.S. economic prospects remain. To be sure, some combination of these concerns has prevented the euro from dropping below 1.3, at least through the first weeks of the new year.

Concerns about U.S. prospects might lessen. European concerns might once more intensify. Either would result in the euro dropping below 1.3 this winter. That is more likely than brighter European prospects or worsening U.S. prospects driving the euro up toward 1.4.