Entries Tagged 'dollar' ↓
May 22nd, 2008 — dollar, us
Readers Question: What would stop the falling dollar?
The dollar has been falling for many reasons. These are some of the factors which would stop the dollar falling and lead to a recovery in the value of the dollar.
Higher Interest rates. US interest rates have been cut to 2% in an effort to stave off a US recession. This causes an outflow of hot money. If interest rates were raised it would encourage people to save in the US and cause an appreciation.
Recovery in US economy. The US fear recession because of a declining housing market, this is leading to lower interest rates and lower confidence about the US economy. If the economy recovered, interest rates would increase and people would have more confidence in buying dollars.
Fears Over the Euro. The main beneficiary of the falling dollar has been the Euro. People are increasingly seeing the Euro as an alternative reserve currency to the dollar. Therefore, investors have been switching out of the Dollar. However, confidence in the Euro may be misplaced. The Euro economy is not much stronger than the US. Many European economies face the prospect of falling house prices; also the strength of the Euro is causing problems for exporters. Arguably, the Euro is overvalued on economic fundamentals - the dollar looks cheap on purchasing power parity. Maybe the sell off of dollars has been overdone.
Continue reading →
March 7th, 2008 — dollar
The pound reached the symbolic value of $2 = £1 yesterday. This is the highest level since New Year’s Eve and is partly in response to the Bank of England’s caution in cutting interest rates. (Yesterday, the Bank left rates unchanged at 5.25%) Despite the slowdown in the housing sector the Bank still appear worried about cost push inflation. Given that their only target is to keep inflation at 2%, it is understandable that the Bank maintains a ‘hawkish’ stance. (’hawkish’ means tough stance i.e high interest rates. The opposite of being a hawk is a dove. A Dove is someone happy to cut rates.)
The futures market suggest that there is a 45% chance of a base rate cut in April. The futures market is basically a representation of what investors think is going to happen. They buy options depending on what value they expect.
Although the pound has been weak against the Euro, the Pound’s strength against the dollar is likely to continue as the US economy continues to experience more problems. The Federal reserve has been keen to cut US interest rates and these lower interest rates have severely undermined the strength of the dollar.
November 6th, 2007 — dollar
The plunging dollar has hit, even the world of fashion, with top models now demanding to be paid in Euros.
Gisele Bündchen, a 27-year-old Brazilian model, is estimated to have a personal fortune of $150m (£72m) She is the face of numerous brands, but, appears to take a keen interest in financial markets. She is now insisting on negotiating contracts in Euro’s arguing that the dollar is likely to continue to remain weak in the coming year, (2008)
3 Reasons to get that $10,000 photo shoot in Euros rather than dollars.
- US Current Account deficit of 6% of GDP
- Falling US House prices, leading to slower growth and potential recession
- A slowdown in growth is likely to lead to lower interest rates in the US - lower interest rates will reduce hot money flows and further undermine the strength of the dollar.
See also:
