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September 20, 2007

US Dollar In Free Fall, Hits All-Time Low Against The Euro Economy

When you spend way more than you earn, there comes a time when nobody wants any more of your damn IOUs. True for individuals, true for nations. The US is about to learn a painful lesson.

Yesterday (Telegraph):

Saudi Arabia has refused to cut interest rates in lockstep with the US Federal Reserve for the first time, signalling that the oil-rich Gulf kingdom is preparing to break the dollar currency peg in a move that risks setting off a stampede out of the dollar across the Middle East.

"This is a very dangerous situation for the dollar," said Hans Redeker, currency chief at BNP Paribas.

"Saudi Arabia has $800bn (£400bn) in their future generation fund, and the entire region has $3,500bn under management. They face an inflationary threat and do not want to import an interest rate policy set for the recessionary conditions in the United States," he said.

The Saudi central bank said today that it would take "appropriate measures" to halt huge capital inflows into the country, but analysts say this policy is unsustainable and will inevitably lead to the collapse of the dollar peg.

As a close ally of the US, Riyadh has so far tried to stick to the peg, but the link is now destabilising its own economy.

The Fed's dramatic half point cut to 4.75pc yesterday has already caused a plunge in the world dollar index to a fifteen year low, touching with weakest level ever against the mighty euro at just under $1.40.

There is now a growing danger that global investors will start to shun the US bond markets. The latest US government data on foreign holdings released this week show a collapse in purchases of US bonds from $97bn to just $19bn in July, with outright net sales of US Treasuries.

The danger is that this could now accelerate as the yield gap between the United States and the rest of the world narrows rapidly, leaving America starved of foreign capital flows needed to cover its current account deficit - expected to reach $850bn this year, or 6.5pc of GDP.

Mr Redeker said foreign investors have been gradually pulling out of the long-term US debt markets, leaving the dollar dependent on short-term funding. Foreigners have funded 25pc to 30pc of America's credit and short-term paper markets over the last two years.

"They were willing to provide the money when rates were paying nicely, but why bear the risk in these dramatically changed circumstances? We think that a fall in dollar to $1.50 against the euro is not out of the question at all by the first quarter of 2008," he said.

"This is nothing like the situation in 1998 when the crisis was in Asia, but the US was booming. This time the US itself is the problem," he said. [Emphasis added]

Today (FT):

The Canadian dollar rose to parity against the US dollar for the first time since 1976 on Thursday, buoyed by soaring oil prices and broad-based weakness in the greenback. [...]

Late in New York, the Canadian dollar rose 1.4 per cent to C$1.0012 against its US counterpart.

Elsewhere, the dollar dropped to a record low through the $1.40 level against the euro as the US currency continued its slide following the Federal Reserve's decision to cut interest rates this week.

Traders said the euro's rise through the psychologically important $1.40 level – seen as a pain barrier for eurozone exporters – triggered a host of stop-loss buying, sending the single currency higher.

The euro rose 0.8 per cent to $1.4071 against the dollar...

The dollar fell 0.4 per cent to $2.0093 against the pound, lost 1.5 per cent against the yen to Y114.44 and dropped 1 per cent to SFr1.1717 against the Swiss franc.

Some analysts put the dollar's weakness down to speculation that Saudi Arabia was set to abandon its peg against the US dollar. [Emphasis added]

When Bush took office, dollars were worth more than euros. Back then, it took about 90 cents to buy what a euro could buy. Now it takes $1.40.

It's not all Bush's fault, but the war — his war — is an important factor. We pay for it by, in effect, printing more and more dollars. That makes dollars worth less and less, which is a huge hidden tax on everybody who holds dollars. We may be approaching the point where the big dollar holders say "Enough!" and start dumping their holdings. Then, look out.

And then there's this, from today's BBC:

Losses from sub-prime mortgages have far exceeded "even the most pessimistic estimates", US Federal Reserve chairman Ben Bernanke has said. [Emphasis added]

This isn't going to be pretty.

Posted by Jonathan at September 20, 2007 07:54 PM  del.icio.us digg NewsVine Reddit YahooMyWeb