Wednesday, July 11, 2007

Credit Market Fall-Out #2 – The Declining US Dollar

Another fall-out from the problems in the US credit market is the effect this will have on the value of the US Dollar, from the WSJ. This is especially true as continued weakness in the credit markets here could force Ben Bernanke to lower interest rates before the end of the year. This, just as the European countries are the process of raising their rates.

Do not under estimate the far reaching effects that weaker credit markets will have on the US economy. In my mind the major issue that is still lurking in the future is what is the US going to do with failing hedge funds that cannot bail themselves out like Bear Stearns did a few weeks ago and the market will not buy their sub-prime mortgage securities except at very deep discounts.

The dollar is weaker against its main rivals early Wednesday after hitting a fresh all-time low against the euro in overnight trading on concerns over the U.S. subprime mortgage debacle.

The euro was at $1.3758 from $1.3730 late Tuesday, while the dollar was at 121.81 yen compared with 121.97 yen. Sterling was at $2.0333 from $2.0273. The dollar was at 1.2020 Swiss francs from 1.2048 francs late Tuesday.

Sterling is also having a field day against the dollar, shooting to as high as $2.0351, a fresh 26-year record.

Profits warnings from U.S. housing and retail sectors, including Home Depot and Sears, and announcements by ratings agencies that they may downgrade subprime debt, have been the catalysts for sharp declines in the dollar over the past two days. These factors are likely to keep weighing on the greenback, analysts said.

"None of this bodes well for the near-term outlook for the dollar, and we'd expect to see further dollar weakness," said Camilla Sutton, currency strategist at Scotia Capital in Toronto.

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