U.S. Dollar Continues to Weaken Against Foreign Currencies
The U.S. dollar has fallen to an all time low, and according to a recent Economist article “Soft currency”, it has never been further out of favor in currency markets.
“On July 23rd, the greenback slumped to $2.06 against the pound, its weakest level since 1981…this week the dollar sagged to €1.38, its lowest rate since the euro’s launch in 1999.”
The article attributes part of this slump to America’s weak economy, which is being dragged down by both the housing market and tumultuous subprime-mortgage market. Analysts at Goldman Sachs suggest the uneasiness about mortgage credit in America “may even have chipped away a little at the dollar’s standing as a reserve currency.” In addition, high oil prices are hurting economic growth and thus the dollar.
All of these factors have played a part in weakening the dollar, but more powerful forces may be driving the dollar down. Stephen Jen, currency economist at Morgan Stanley, explores the fear that Asia’s central banks will diversify out of their large holdings of American debt, including pension, insurance and mutual funds with controlling assets worth $20.7 trillion. On one hand this capital outflow may reflect investors beginning to realize the danger of relying excessively on home-country assets, but on the other hand, wariness about the dollar may be part of the motivation to diversify. Stephen Jen argues
“If the dollar has suffered most, it is only because American institutions are the biggest pioneers of financial globalization.”
Taking a closer look at current account deficits, The Economist finds that currency markets are largely unconcerned about trade imbalances. Dollar frailty seems to validate concerns about America’s persistent current-account deficit and the associated build-up of overseas debt, yet countries like Britain, Australia and New Zealand, whose currencies have gained most at the dollar’s expense, have large external deficits and debts too. The article concludes with some hope that if anxiety about global imbalances is not driving currency markets, the dollar might improve once America’s economy is back on its feet.
You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.