Date:04/12/2006 URL: http://www.thehindu.com/2006/12/04/stories/2006120403901100.htm

Opinion - News Analysis

The fall of the dollar

Heather Stewart

THE SLOWDOWN in the United States economy, which has sent the dollar into freefall over the past fortnight, will have devastating knock-on effects in markets around the world, analysts warn.

As the U.S. slows, and consumers in the world's biggest economy feel the buying power of the dollar in their pocket declining, global growth will be hit hard, economists say.

Wall Street is now betting that Federal Reserve chairman Ben Bernanke will slash interest rates to stave off a recession. The dollar ended the week at $1.98 against the pound, and $1.32 to the euro, but analysts say there is further weakness to come. "I think the dollar's going to hell in a handbag," said David Bloom, currency strategist at HSBC.

Some analysts have argued that a more balanced global economy, with strong growth in Asia and Europe, means the impact of a U.S. slowdown will be limited; but Stephen Roach, chief economist at Morgan Stanley, believes China — and in turn the rest of Asia — will follow.

"America is China's largest export market, accounting for 21 per cent of its total exports over the past five years," he said, adding that economies such as Japan, Korea, and Taiwan, which export directly to the U.S. but also sell components to China that are assembled before being sent on to the U.S., will be hit.

Eurozone Finance Ministers have expressed alarm at the strength of the euro against the dollar, fearing that their exporters will suffer; but the European Central Bank (ECB) is expected to push up interest rates by another quarter-point on Thursday, as it frets about inflation.

Despite increasing signs of weakening demand in the world's biggest economy, ECB chairman Jean-Claude Trichet has insisted the 12-member single currency zone can shrug off a U.S. slowdown.

Wall Street will also be watching Mr. Bernanke for signals of a change. The Fed has left rates on hold at 5.25 per cent since the summer, after increasing them 17 times over the previous two years as the U.S. economy recovered from the post-dotcom downturn. Mr. Bernanke sought to reassure the currency markets last week by stressing that the Fed is still concerned about inflation, but his words failed to stem the sell-off.

Equity markets are already wobbling as investors weigh the cost of a U.S. slowdown. Graham Turner of GFC Economics said a shake-out would raise questions about this year's merger frenzy.

"We have had an absolute monster year in terms of leveraged transactions," he said. "A lot of them looked quite dubious in terms of their economic value. Once the market starts to retreat, all the suspect things come out of the woodwork." —