Germany's DAX index sank to a near one-year low on Friday, knocked down by rising worries about the strength of Europe's biggest economy. Westpac Senior Economist James Shugg says Germany is not buckling yet.

SHOWS: LONDON, ENGLAND, UK (OCTOBER 10, 2014) (REUTERS - ACCESS ALL)

1. WESTPAC, SENIOR ECONOMIST, JAMES SHUGG, SAYING:

JOURNALIST ASKING JAMES SHUGG: 'This disconnect, James, to start with between the market- the market thinking and the Fed thinking, do you think that is real, that disconnect and how dangerous is that?'

SHUGG: 'Well, I think we had Bill Dudley say that he was uncomfortable with rates at the lower bound but that discomfort is probably worth having rather than tightening policy too early. And there are still plenty of headwinds confronting the U.S. economy. There are a range of views at the Fed. We suspect that the most dovish are held by Kocherlakota, Yellen and Dudley. And the latter two, of course, have a lot of influence at the Fed and so I think that the market shifting its view towards a later, the beginning to the tightening cycle is the appropriate one.'

JOURNALIST: 'All right. So that reins the dollar in a little bit I guess and we've seen that. Where is the euro headed? I mean is it headed any lower from where it is now in your view?'

SHUGG: 'It may well dip lower on any sort of news that sounds like the ECB is going to do something more. But whether or not that is going to be sustainable is another question. I mean, if we got a weaker U.S. economic story coming through, than is currently priced in and the ECB fails to deliver on further stimulus anytime soon, then it may be that you've seen the lows for the euro already. Our view is that there will be further policy stimulus next year from the ECB but certainly before the end of this year, I think that we may not see this potentially lower euro.'

JOURNALIST: 'Right. And of course, I guess one of the big stories doing the rounds now and I want to tie this in with China as well, is that the market now thinks some form of fiscal adjustment will come in Germany, at least the German government seems to be hinting as much. Do you think they're going to buckle?'

SHUGG: 'Well, it's not really buckling because the one I've heard them talk about is the forced saving of Germans, the amount they are required to set away or put away might reduce a little bit. So that allowed Germans to spend a little bit more for their own money and it wouldn't impact on the government's budget position, their intention to get back to the flat next year. Now, if it gets more serious than this, then the government may need to ease back a bit but that doesn't mean that gives scope to France and Italy to sort of backtrack on their budgets because their starting point position of course is much more precarious. '

JOURNALIST: 'Sure. And then just finally, I say I want to bring China in. We've got some big China numbers out next week. These are going to be critical as well as part of this jigsaw. I know that Merkel is meeting Chinese Premier Li today, I think. I mean, what are those two going to talk about?'

SHUGG: 'Well, they'll probably talk about the trade relationship and forging relationships in terms of direct trading of the Renminbi against the euro and getting that moving more quickly. But I think there might also be just discussion about what the Chinese economy is doing in terms of growth. I mean the Westpac MNI Chinese Consumer Confidence Index is telling us that there's a lot of weakness in prospect if the Chinese don't stimulate further.'