Another day, another fall in the dollar

[N.O.R.F]

1 pound for 2 dollars, what a rate ey!!

 

Another day, another fall in the dollar

 

 

The White House wants a strong greenback but the US deficit is weighing heavily

 

Ashley Seager

Wednesday November 29, 2006

The Guardian

 

 

The dollar came under pressure for the fifth day in row yesterday as further evidence of weakness in the world's largest economy emerged and as a key international body warned that the US economy was running out of steam.

Henry "Hank" Paulson, the US treasury secretary, reiterated on a visit to London that the Bush administration remained wedded to a "strong dollar" but this failed to stem the tide as dealers bet that the long-expected slump in the greenback's value had finally arrived.

 

Having recovered some lost ground late on Monday, the dollar set a fresh two-year low of just above $1.95 against the pound in hectic trading yesterday. There is widespread speculation that it could soon breach the $2 level - something it has not done for 14 years. It also slid to a 20-month low against the euro of $1.318. The US currency has now shed 11% of its value against the euro this year and 12% against the pound.

In reality, though, the dollar has been falling steadily for four years. On a trade-weighted basis against a basket of other currencies, it has lost nearly 31% of its value as fears over its giant current account deficit drag on the currency.

 

A big deficit, caused by Americans consuming more goods from abroad than they export, theoretically pushes a currency down until imports become more expensive and exports cheaper, at which point the deficit is reduced. But the dollar has held up because big exporters to the US, such as China, have used their current account surpluses to reinvest in American assets, thus keeping demand for dollars high.

 

Indeed, the dollar surprised everyone in 2005 by regaining some of the losses of the previous three years and so is still not back to the lows it visited at the end of 2004, in spite of the recent falls.

 

A weaker dollar means a shopping bonanza for Britons. Airlines and travel firms have seen a surge in bookings as people rush to take advantage of cheap US goods that just got cheaper. The flipside, though, is for British companies such as Jaguar to get hit hard in the American market if prices in dollars rise.

 

About 10% of British trade is with the United States, so exporters will suffer from the stronger dollar but importers of US goods will see costs fall. Petrol prices at the pump could fall as the world's oil and oil products are priced in dollars.

 

Mr Paulson, former head of the US investment bank Goldman Sachs, repeated the usual mantra of US treasury secretaries that he favoured a strong dollar. "A strong dollar is clearly in our nation's interest and I feel very good today about the strength of the US economy," he said after addressing the CBI conference in London.

 

He was upbeat about the US economy in spite of the slowdown in growth and, in particular, the housing market. "We have a healthy economy that is making a successful transition from a rate of growth that earlier in the year was not sustainable to one that is sustainable."

 

Mr Paulson said again that the US sought greater flexibility from China. The US has long wanted Beijing to let its currency rise against the dollar to remove the artificial advantage that the pegged yuan gives Chinese exporters.

 

But data out shortly after he spoke showed that the weakness in the dollar might be more home-grown. Orders for durable goods fell unexpectedly sharply, by 8.3% in October from September, driven by big falls in civilian aircraft, computer and electronics orders.

 

James Knightley, of ING Financial Markets, said: "This perhaps suggests that the US economic slowdown is spreading to the corporate sector." He said the Federal Reserve, which raised rates from 1% in 2004 to 5.25% this year, may cut them again as soon as March.

 

But Ben Bernanke, Federal Reserve chairman, said in a speech last night that there were still inflationary forces in the US economy and hinted that the Fed may need to raise rates. That dampened hopes for an early rate cut, although Mr Bernanke noted that the weak housing market posed a downside risk to growth.

 

Data released yesterday showed sales of existing homes rose in October for the first time since February, to an annual rate of 6.24m homes. But the figures also showed that house prices dropped 3.5% on a year earlier - the third straight month of decline and the worst year-on-year fall since records began in 1968.

 

To compound American woes, the Paris-based Organisation for Economic Cooperation and Development said in its latest outlook that the US economy was slowing and would only grow by 2.4% next year after a downwardly revised prediction of 3.3% for this year.

 

It blamed the housing market slowdown for the lacklustre US performance but said the rest of the world would march on. Jean-Philippe Cotis, the OECD's chief economist, said: "Rather than a major slowdown, what the world may be facing is a rebalancing of growth across OECD regions."

 

http://www.guardian.co.uk/usa/story/0,,1959560,00.html

[Pujah]

I guess now is the time to invest in $dollar.