Weakened by the real-estate market, the dollar continues its decline
By Cécile Prudhomme
Le Monde, 24 July 2007
Once more the euro broke its historical record since its inception in 1999, trading for 1.3845 dollar on Monday July 23. The greenback keeps going down compared to all the important currencies on the foreign exchange market. The sterling has never been so high since May 1981, at 2.0603 dollars, the New-Zealand dollar hit its best rate since 1985 at 0.8034 dollar and the yen reached its best level since May, at 120.42 yens per dollar.
factors weigh on the American currency, to start with the interest rate
prospects viewed from each sides of the
than the interest rates level, it is primarily the tensions on mortgage
bonds in the
Due to the sophistication of the financial mechanisms, these loans, originally recorded in the balance sheets of banks, were restructured (via securitisation) into high yield financial assets [semi junk bonds...] and were sold to investors. Many hedge funds bought them and took on the final risk. But a week ago, American rating agencies warned investors that they might have difficulties getting their money back with these assets, thus contributing to the fall in prices.
Recently, the American investment firm Bear Stearns declared that two of its funds, which had purchased large amounts of that kind of assets, had lost all value. And many American banks increased their provisions to offset the risk of losses. JPMorgan Chase, for instance, said on July 18, that it had increased three fold the amount of provisions for potential losses on paper assets in the real estate sector. As a consequence, access to the credit market (structured bonds, corporation loans, loans to finance acquisition of firms…) has become more expensive due to the rise of risks and the prudence of investors.
Now those are afraid to witness new losses – which for the time being are estimated to be between 50 and 100 billion dollars –, which more generally undermine the value of the greenback. “The index value of the dollar, weighted with the commercial exchanges of six different currency zones, has reached its lowest level since 1992, a fact that should be worrisome to the Treasury and the central bank”, stresses Ashraf Laidi, currency strategist at CMC Markets. Questioned during his bi-annual hearing in Congress, on July 18, the president of the Fed, Bern Bernanke, declared that he had no comment to make on exchange rates, the responsibility of which is the Treasury’s. He said, however, that he did not expect to see a dollar crisis similar to that of 1979 and 1980.
Many economists today think that the greenback will keep declining gradually until it reaches 1.40 dollars for one euro, possibly more. According to Mr. Laidi, “the rhythm of progression of the euro opens the way to a value of 1.42 dollar before the end of September”. Experts at BNP Paribas also just revised their forecast for the value of the euro from $1.40 to $1.42. Speculators on the Forex bet on this trend too. Analysts at Société Générale noted that hedge funds recently invested heavily to take advantage of the weakness of the American currency.
that the recent evolution of currencies will exacerbate the dispute between
France and European authorities about a strong euro. So far
Translated by André Cabannes