Is the dollar in the doldrums?

By Julian Sudre

While the recent 50 basis points rate cut by the Federal Reserve to 4.75 per cent has undoubtedly boosted stock markets, the aggressive cut was a single whammy for the greenback and now investors are focusing on concerns over US growth and inflation. The dollar today has reached an all-time low against the euro and speculations that Saudi Arabia might revalue the riyal for the first time in 21 years has exacerbated sentiments – a move that Kuwait took in May when it dropped the long-held dollar peg.

Now, the US dollar is at parity with its Canadian counterpart for the first time since 1976. Analysts have started to wonder how far the impact of the US economy could be affected.

Sources close to the matter have said that the Fed was swapping systematic and liquidity risk for longer-term inflation risk.

Of course a lower currency typically fosters worries for inflation but its yearly continual decline that was too gradual did not trigger the Fed to consider raising interest rates instead.

On one hand, the falling dollar is good news for multinational corporations as American-made goods are more affordable in international markets but on the other hand foreign investors who contribute to finance the country’s debt will be frightened away. The result will aggravate investment in US Treasury securities and the US government will have to pay higher rates at weekly auctions to find buyers for its bills, notes and bonds. The borrowing costs for Americans could be pushed up.

US economic concerns were compounded by a six-month fall in sales of existing homes with a US home prices decline – a steepest drop in 16 years.

Those declines have given food for thought to the Federal Reserve and although it is too early days to lower the benchmark interest rate further, the question is now what will happen at the two remaining meetings this year.