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Dollar starts the big slide against major currencies

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posted on May, 2 2006 @ 03:27 PM


THE dollar has embarked on a big decline that will see it fall against all leading currencies, according to analysts.

The plunge is being prompted by America’s $800 billion (£438 billion) current-account deficit, they say.

The dollar has been under pressure following last weekend’s meeting of G7 finance ministers and central bankers, which emphasised “global imbalances” and said currencies should reflect economic fundamentals.

Then China raised its key interest rate to 5.85%, its first hike for months, and Ben Bernanke, the new Federal Reserve chairman, hinted that American rates would pause at 5% after a rise in May.

Analysts say that without interest-rate support, the dollar will be weighed down heavily by America’s imbalances.

“I think this is it,” said Tony Norfield, global head of currency strategy at ABN Amro. “The dollar has been supported by high yields but markets are saying that is no longer enough. The question for policymakers is going to be how to manage the dollar’s decline. It won’t be a one-way street but the fall is likely to be biggest against Asian currencies.”

The euro has already risen to an 11-month high of more than $1.26, while the dollar is at a three-month low of 113.70 against the yen. The Canadian dollar, known by traders as the “loonie”, rose to a 28-year high on Friday, boosted by a hike in Canadian interest rates.

Sterling climbed back above $1.80, closing above $1.82 in New York on Friday.

If I remember my economics correctly, the proper course of action is for the Federal Reserve to raise interest rates to force the trade imbalance lower.

The prime rate should probably be sitting at about 9.5% to 12% right now.

That would do 2 things:

1) Bring housing sales to a screeching halt

2) Cause credit card interest rates to rise.

The first won't do much for the trade imbalance, but the second one will reduce disposable income, stopping purchases and lowering the trade imbalance, plus it will cause credit card interest rates to rise, causing balances to balloon and minimum payments along with it, which will both reduce disposable income and limit consumer credit spending, causing the trade imbalance to fall, i think.


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