Monday September 22, 2008 - 20:21:47 GMT
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Reuters - www.reuters.com
FOREX NEWS-US dollar tumbles as bailout plan stokes deficit concern
* Worries on deficit implications of bailout hurt dollar
* Dollar falls to multi-week lows vs euro, sterling
* Some analysts say bailout to ultimately support dollar
(Updates prices, adds comment, changes byline)
By Vivianne Rodrigues
NEW YORK, Sept 22 (Reuters) - The U.S. dollar tumbled,
hitting multiweek lows against the euro and against sterling on
Monday as the U.S. government's bailout plan to ease a
financial credit crisis reignited worries about the country's
massive budget deficit.
The $700 billion package, which is awaiting congressional
approval, would give sweeping powers to the U.S. Treasury to
buy mortgage-related bad debts from financial firms, including
U.S. subsidiaries of foreign banks.
But analysts say foreign investors will be increasingly
reluctant to finance the growing U.S. deficit at the current
dollar exchange rate and that funding the gap would require
higher interest rates and a weaker currency.
"Nobody knows what form the bailout package will take. We
only know vaguely how much it will cost," said Ron Simpson,
director of currency research at Action Economics in Tampa,
Florida. The U.S. fiscal position "does not look pretty for
this year and next ... Overall, the uncertainty is driving the
current flight out of the dollar," he added.
In late afternoon trading in New York the euro was trading
at three-week highs of $1.4837 <EUR=>, up 2.5 percent on the
day, putting the European currency on track for its biggest
one-day gain since its inception in January 1999.
Sterling also benefited from dollar selling, climbing as
high as $1.8643 <GBP=>. It was last trading at $1.8615, up 1.6
percent on the day.
The Congressional Budget Office has forecast a record U.S.
budget shortfall of about $438 billion in the next fiscal year,
excluding the cost of the bailout. The rescue package is
expected to raise the government's debt ceiling 6.6 percent.
Against the Swiss franc, the dollar fell more than 3
percent to last trade at 1.0703 francs <CHF=>, according to
Analysts also raised questions about the ultimate form of
the government's proposed $700-billion solution to the credit
squeeze and how the illiquid and damaged assets held by banks
will be valued and taken onto the government's books.
The scope of the Treasury's bailout plan could be extended
from covering only mortgage-related assets to other troubled
assets, potentially including credit card and loan debt, they
UNCERTAINTY WEIGHS ON DOLLAR
"This could significantly increase the initially proposed
cost of the program and expose the government's balance sheet
and thus the taxpayer, to even greater uncertainty," wrote
Sacha Tihanyi, associate currency strategist at Scotia Capital
"This uncertainty should continue to weigh on the
performance of the dollar going forward, and possibly depress
international demand for U.S. assets."
Some analysts, however, lauded the U.S. government plan,
saying they believed that the Treasury had to act to prevent
worsening turmoil in financial markets.
The market may be too fixated on the amount of growth of
the government's debt, but may be underappreciating the fact
that the government is also taking on assets, says Marc
Chandler, head of global strategy at Brown Brothers Harriman in
"We recognize the genuine concerns about the trajectory of
U.S. fiscal policy, (but) we think that although the U.S.
dollar gets punished in the short term because of the bold and
innovative approach by U.S. policy-makers, the U.S. will be
rewarded in the medium term for the same reason," he said.
Adding to the list of significant developments following
the Lehman Brothers collapse last week, Goldman Sachs and
Morgan Stanley were granted approval on Sunday to become
banking holding companies regulated by the U.S. Federal
Reserve, enabling them to take deposits and gain easier access
to financing as they fight for survival in the current credit
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