Dollar Falls as Bailout Erodes Confidence in the Dollar

Many analysts and economists think that the US bank problems and bailout are going to weaken the dollar in at least the short to medium term. The Treasury has printed 1 trillion in new dollars over the last week. Combine that with the war in Iraq, growing entitlements, etc. and you have a lot of dollar bills circulating through the world.

Many analysts and economists think that the US bank problems and bailout are going to weaken the dollar in at least the short to medium term.  The Treasury has printed $1 trillion in new dollars over the last week as they have bailed out AIG, the banks, and money market funds.  Combine that with the war in Iraq, growing entitlements, etc. and you have a lot of dollar bills circulating through the world.

Chuck Butler, author of the Daily Pfennig had this to say in his newsletter:

"And... It looks like currency traders are beginning to worry about tomorrow too, as they begin to mark down dollars once again. You see, eventually, the underlying fundamentals do come to the top, just like I said they would... You see, it's not just the $700 Billion bail out... Recall we had the $150 Billion stimulus checks, we had the mortgage bill costs, we have the ongoing costs of the war in Iraq, Afghanistan, and on terror, and just for good measure, we now have an additional $400 Billion to guarantee money-market funds, that just last week "broke the buck"...

So... Just last week, the U.S. Treasury and Fed spent over $1 Trillion dollars to keep things running... And that's 1 Trillion dollars that will have to be printed folks... That means more supply of dollars, and once again, the dollar should be punished for that indiscretion!"

He's not along.

``As we get to the other side of this, the dollar will get crushed,'' said John Taylor, chairman of New York-based International Foreign Exchange Concepts Inc., the world's biggest currency hedge-fund firm, which manages about $15 billion.

Here's another optimistic analyst:

"`The downdraft on the dollar from the hit to the balance sheet of the U.S. government will dwarf the short-term gains from solving the banking crisis,'' said David Woo, London-based global head of foreign-exchange strategy at Barclays, the third- biggest currency trader, according to a 2008 survey by Euromoney Institutional Investor Plc."

A drop in interest rates could also hurt the dollar.  The Federal Funds Prediction Chart shows that the probability of the Fed cutting rates is now greater than 50%.  If the US cuts more than other countries, this will put further pressure on the dollar.  The dollar had rallied in the last couple of months as investors began to think the US economy was further along in working through its problems while the rest of the world was just beginning to feel a slowdown.  That no longer appears to be the case.

Sam Cass
Sam Cass: Sam Cass, MBA, JD, University of Texas at Austin. Always a fan of Leonardo Da Vinci.

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