Dollar falls again amid growing US fears
Pastor Dale Morgan
Dollar falls again amid growing US fears*
· Wall Street threatened by crumbling housing market
· Pound hits its highest value in 26 years
Larry Elliott and Andrew Clark
Thursday July 12, 2007
The Guardian
The dollar remained under strong pressure on the foreign exchange
markets last night as fresh concerns were raised about the vulnerability
of Wall Street to the crumbling American housing market.
With the pound trading at its highest level against the dollar since
1981, the credit rating agency Moody's said it had placed a new $6bn
(£3bn) tranche of securities backed by US mortgages under review for a
possible downgrade. The move followed separate announcements by Moody's
and a rival ratings agency, Standard & Poor's, on Tuesday, that put
$17bn of sub-prime mortgage-backed securities on credit watch, adding to
growing concerns about the health of the world's biggest economy.
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Sterling hit a 26-year high of $2.0363 against the US currency at one
point in London trading yesterday before dropping back to $2.0322. Nick
Parsons, head of markets strategy at nabCapital, said the dollar, which
hit a record low of $1.3787 against the euro, was likely to fall
further. "The economic brakes in the US have been slammed on in a
massive, massive way," Mr Parsons said, adding that he expected US
retail sales figures tomorrow to be weak. The impact on consumer
spending from falling house prices was being compounded by credit
becoming scarcer and more expensive, he said.
This week's turmoil on Wall Street and the signs that the housing market
remains in decline will increase pressure on Ben Bernanke, chairman of
the US Federal Reserve, to signal a willingness to cut interest rates
later this year. Wall Street's financial institutions and pension funds
are thought to be heavily exposed to possible losses in collateralised
debt obligations (CDOs) - packages of debt including mortgages owed by
American households that are bought and sold in the financial markets.
After booming in the low interest-rate environment from 2003 to 2005,
the past two years have seen a savage retrenchment in the US real estate
market, with fewer homes being built, prices falling and a sharp
increase in mortgage arrears and repossessions. Fears that the highly
complex financial instruments might be worth far less than previously
expected has triggered the threat of downgrades from the credit
agencies. "The ratings agencies are far behind the curve in adjusting to
the reality of a rapidly deflating property market", said Graham Turner
of GFC Economics. "Indeed these bonds represent a fraction of the
residential mortgage-backed securities (RBMS) at risk."
Although the National Association of Realtors warned yesterday that US
home sales and prices would fall further in 2007 than earlier expected,
there were no signs from the central bank - the Fed - that it intends to
ease policy. Charles Plosser, president of the Philadelphia federal
reserve bank, said the downturn in the housing market had not changed
forecasts for economic growth to return to trend by the end of the year.
"The recent reversal of the boom in housing activity and house prices
has contributed to a slowdown in economic growth," he told an economic
forum in London. "But the consequences of the declines in housing
activity and house prices, in my view, have so far not derailed the
prospect that economic growth will return toward trend at the end of
2007 and in 2008". The weakness of the dollar has become so severe that
it is almost at the same level of its counterpart north of the 49th
parallel. Canada's so-called "loonie", nicknamed after a bird called the
common loon depicted on dollar coins, reached 95.74 US cents on Monday -
its highest point for 30 years.
Soaring prices for agricultural produce, metals and minerals have
bolstered the economy north of the 49th parallel, together with a fiscal
tightening by Canada's central bank. Canada's currency has appreciated
by 45% against the US dollar over five years. Monday's rate was the
highest since March 1977.