Dollar Drops on Uncertainty over U.S Automakers Bailout Plan
Posted on 16. Dec, 2008 by admin in USD Analysis, USD Economic Analysis, USD News
The Dollar responded negatively to concerns about further weakness in the U.S. economy and today’s Federal Reserve policy meeting. The currency has hit a two-month low against a basket of major currencies, with the greenback falling to $1.3727 against the EUR, the weakest level since October 14. It has also dropped against the JPY to the level of 90.50 Yen, after hitting a 13-year high of 88.10 on Friday. The Dollar also extended its drop versus the GBP after the U.S. Treasury reported yesterday that international demand for long-term U.S. financial assets weakened in October as foreign investors began to dump risky positions and are no longer interested in investing in the U.S. currency.
The USD has depreciated an uncertainty that surrounds the fate of the government’s bailout plan for U.S automakers, and the bailout’s possible economic impact. After the U.S. Senate on Thursday rejected a bailout plan to avert a possible bankruptcy by one or more of the nation’s three automakers, the U.S officials said on Friday that the government was considering tapping a $700 billion financial industry bailout fund to prevent a collapse of ailing U.S. automakers. As a result, the market is reacting by weakening the USD further, since investors fear that a failure of any of the automakers would produce a year long recession and may drag other companies under as well.
Meanwhile investors await the outcome of the policy meeting by the Federal Reserve on Tuesday to see how close to zero the U.S. central bank will cut its Interest Rates. The Fed is widely expected to cut rates by 50 basis points or more from its 1% benchmark. With Interest Rates rapidly approaching zero, the Fed may also indicate more steps to provide liquidity into the market in order to support the U.S economy through a recession. But whatever the Fed comes up with, it’s not likely to spark a sudden turn round in the U.S. economy, and therefore it’s quite difficult to expect a sudden recovery in the Dollar.
