The U.S. housing slump may seem like old news, but its stark consequences are taking a further toll on the U.S. dollar. The continued concern of the housing slump spilling over into the economy caused the dollar to fall against 11 of the 16 major currencies. Against the euro specifically, the dollar hit a record low. The latest industry report has shown that U.S. foreclosures have increased by 87 percent in June from a year earlier. Traders have strong convictions that the Fed will keep interest rates unchanged. Jens Nordvig, a senior currency strategist at Goldman, Sachs & Co. in New York stated: “The weakness in the housing sector may feed into consumption and weigh on growth, which may bring a Fed ease back on the table.â€
The U.S. dollar traded at $1.3768 against the euro this morning, only slightly up from yesterday’s record low of $1.3798. Ian Gunner, head of foreign-exchange research at Mellon Bank NA in London, has predicted a further fall in the U.S. currency to $1.41 by next week. Overall, the dollar has fallen 1.2 percent against the euro in the past 3 days as Standard and Poor’s and Moody’s Investors Services downgraded ratings on the majority of loans backed by subprime mortgages. And more negative ratings are yet to come.
The U.S. currency also fell to 122.18 yen from yesterday’s 122.48 despite today’s decision by the Japanese Central Bank to hold interest rates at 0.5 percent. According to the Daiwo Institute of research in Tokyo, the U.S. dollar may even weaken by 5 percent to 116 yen by the end of the year. The Institute is predicting the U.S. housing slump to hurt consumption forcing the Fed to lower interest rates by year end. Today’s traders betting on interest-rate futures believe there is a 21 percent chance of lowered interest rates. This prediction is up 8.9 percent from last week. Further indicators of a spill by the housing market are poor profit expectations for July by Sears Holding Corp. and Home Depot Inc. Both companies have stated profits for July will fall as the decline in housing prices have hurt demand for home building goods.
Another factor affecting the weakened dollar is a new report indicating a widened U.S. trade deficit for May. Despite record exports, imports still remain on top by $60 billion. The widened gap has largely been due to rising prices on imported oil which rose by 3.6 percent. The fact that a third of this gap is the trade imbalance with China has had a diminishing influence on the dollar as well. Despite mixed reviews on running a trade deficit, the U.S. dollar will have to come a long way before regaining in strength. Â Â Â Â Â
Posted: July 12th, 2007 under General.
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