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.
Several
factors weigh on the American currency, to start with the interest rate
prospects viewed from each sides of the
But, more
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.
No doubt
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