Another rate cut and the fate of the dollar will be sealed.World may see the end of the dollar era. Will it will mark the end of dollar hegemony as some experts are
believing?Although nobody can quantify the havoc an incessantly weakening dollar may wreck on the global economy,experts unanimously believe that it will be immense.Already FED Chairman Ben Bernanke has signalled another rate cut which has sparked a rally in bullion, crude oil,metal and commodity prices.Gold is touching new highs due to heavy buying by the funds as an hedge against inflation or a “political and economic uncertainty”. Gold rose to a record $976.32 in London while crude oil has risen to a record $103.05 a barrel. It seems the market is already factoring in another rate cut. Bernanke also said a housing slump may cause smaller U.S. banks to fail and unemployment to increase, fueling speculation Fed policy makers will increase the pace of interest-rate cuts.Market expects a 50-75bps rate cut in March’08.
The wide spread pessimism regarding dollar doesn’t stand on weak grounds but is backed by firm evidences. The dollar fell to the lowest in almost three years versus the yen and a record against the euro on growing signs of U.S. economy slipping into a recession. The dollar traded below 105 yen for the first time since May 2005 after Federal Reserve Chairman Ben S. Bernanke said the weaker currency is helping reduce the trade deficit. Euro is trading at an all time high of $1.52 since its launch in 1999. Since the euro's introduction, the dollar has declined 23 percent against the single currency, and 46 percent from a record high of 1.2089 euros in October 2000. Merrill Lynch & Co. analysts led by Daniel Tenengauzer forecast the euro to ``peak'' at $1.57 around the end of March. The dollar is headed for its biggest monthly fall of over 2.3%against the euro since September before a government report likely to show consumer spending stagnated in January, giving the Fed more reason to cut interest rates.The U.S. Dollar Index, which tracks the currency against six major counterparts, yesterday declined to 73.63, the lowest since its start in 1973.
The Fed has also lowered its 2008 growth forecast to 1.3 % - 2 %, from a forecast of 1.8 % - 2.5 % in November. Meanwhile, the US Trade Deficit narrowed in 2007, for the first time in six years, to 711.6 billion dollars from 758.5 billion in 2006, according to the Commerce Department. U.S. exports in 2007 rose to a record $1.62 trillion, lifted by an 18 percent jump in goods sold to China, an 8 percent increase in shipments to Canada and 5 percent more sales to Japan. The export boom for American businesses comes at the expense of some international rivals, and the euro's strength is becoming an irritant to some finance ministers in the EU. Treasury Secretary Henry Paulson said he favors a ``strong'' U.S. dollar that reflects the competitiveness of the world's largest economy in the long term.
Moreover there is no end to the bad news which are continuously flowing into the market,confirming the fears. According to the U.S. data, consumer sentiment hit a five-year low and consumer expectations slumped to the worst in 17 years, supporting the view that economy may be in a recession. Ben Bernanke has already confirmed what his various Fed colleagues had been saying: that they are more worried about growth than inflation, tacitly promising more rate cuts.So in near term the decline of dollar is likely to continue uncontested.Latest German economic data hints that European Central Bank may not cut interest rates as of now, thus keeping the Euro strong.Looking at US history government may not intervene as of now. U.S. government hasn't intervened in markets to bolster the dollar since August 1995. The last time a U.S. Treasury chief directed the Fed to buy or sell currencies was in September 2000, when it sold dollars for $1.33 billion in euros.Another bad news appears on the inflation front.Rises in the oil price have correlated with gains in euro against the dollar. A higher oil price does greater damage to the US than other big economies because of the US’s well-known oil addiction. It also shows that inflation pressures, whatever the Fed says, have not gone away.
So Ben seems to be in a catch-22 situation.Cutting interest rates is imperative to stimulate growth & tackle sub-prime mortgage writedowns which have already crossed $100bn and are feared to rise upto $300bn.So infusing liquidity is important.On the other hand weak dollar is pushing up commodity prices causing inflation above comfort zone.But for now Ben seems to be ignoring inflation fears and may go ahead with a rate cut. Soon global financial system may see itself coming to terms with the death of the dollar and the turmoil thereafter.
believing?Although nobody can quantify the havoc an incessantly weakening dollar may wreck on the global economy,experts unanimously believe that it will be immense.Already FED Chairman Ben Bernanke has signalled another rate cut which has sparked a rally in bullion, crude oil,metal and commodity prices.Gold is touching new highs due to heavy buying by the funds as an hedge against inflation or a “political and economic uncertainty”. Gold rose to a record $976.32 in London while crude oil has risen to a record $103.05 a barrel. It seems the market is already factoring in another rate cut. Bernanke also said a housing slump may cause smaller U.S. banks to fail and unemployment to increase, fueling speculation Fed policy makers will increase the pace of interest-rate cuts.Market expects a 50-75bps rate cut in March’08.
The wide spread pessimism regarding dollar doesn’t stand on weak grounds but is backed by firm evidences. The dollar fell to the lowest in almost three years versus the yen and a record against the euro on growing signs of U.S. economy slipping into a recession. The dollar traded below 105 yen for the first time since May 2005 after Federal Reserve Chairman Ben S. Bernanke said the weaker currency is helping reduce the trade deficit. Euro is trading at an all time high of $1.52 since its launch in 1999. Since the euro's introduction, the dollar has declined 23 percent against the single currency, and 46 percent from a record high of 1.2089 euros in October 2000. Merrill Lynch & Co. analysts led by Daniel Tenengauzer forecast the euro to ``peak'' at $1.57 around the end of March. The dollar is headed for its biggest monthly fall of over 2.3%against the euro since September before a government report likely to show consumer spending stagnated in January, giving the Fed more reason to cut interest rates.The U.S. Dollar Index, which tracks the currency against six major counterparts, yesterday declined to 73.63, the lowest since its start in 1973.
The Fed has also lowered its 2008 growth forecast to 1.3 % - 2 %, from a forecast of 1.8 % - 2.5 % in November. Meanwhile, the US Trade Deficit narrowed in 2007, for the first time in six years, to 711.6 billion dollars from 758.5 billion in 2006, according to the Commerce Department. U.S. exports in 2007 rose to a record $1.62 trillion, lifted by an 18 percent jump in goods sold to China, an 8 percent increase in shipments to Canada and 5 percent more sales to Japan. The export boom for American businesses comes at the expense of some international rivals, and the euro's strength is becoming an irritant to some finance ministers in the EU. Treasury Secretary Henry Paulson said he favors a ``strong'' U.S. dollar that reflects the competitiveness of the world's largest economy in the long term.
Moreover there is no end to the bad news which are continuously flowing into the market,confirming the fears. According to the U.S. data, consumer sentiment hit a five-year low and consumer expectations slumped to the worst in 17 years, supporting the view that economy may be in a recession. Ben Bernanke has already confirmed what his various Fed colleagues had been saying: that they are more worried about growth than inflation, tacitly promising more rate cuts.So in near term the decline of dollar is likely to continue uncontested.Latest German economic data hints that European Central Bank may not cut interest rates as of now, thus keeping the Euro strong.Looking at US history government may not intervene as of now. U.S. government hasn't intervened in markets to bolster the dollar since August 1995. The last time a U.S. Treasury chief directed the Fed to buy or sell currencies was in September 2000, when it sold dollars for $1.33 billion in euros.Another bad news appears on the inflation front.Rises in the oil price have correlated with gains in euro against the dollar. A higher oil price does greater damage to the US than other big economies because of the US’s well-known oil addiction. It also shows that inflation pressures, whatever the Fed says, have not gone away.
So Ben seems to be in a catch-22 situation.Cutting interest rates is imperative to stimulate growth & tackle sub-prime mortgage writedowns which have already crossed $100bn and are feared to rise upto $300bn.So infusing liquidity is important.On the other hand weak dollar is pushing up commodity prices causing inflation above comfort zone.But for now Ben seems to be ignoring inflation fears and may go ahead with a rate cut. Soon global financial system may see itself coming to terms with the death of the dollar and the turmoil thereafter.
