One of the dramas gripping the U.S. economy is that of sub-prime mortgages. Act two - which is all about house and housing prices. asset-backed commercial paper and the three month Libor rate - came to a spectacular end when the Federal Reserve cut interest rates by an aggressive 50 basis points. Act three will be about the dollar. If low interest rates have caused foreign investors to lose confidence in the U.S. currency then the chances of recession and recessionary pressures in the world’s largest economy will rise. Mortgages are linked to long term rates more than to base rates. It is more than the possible that the cost of new mortgages will rise and as a result of the Fed’s cut.
If foreign investors anticipate inflation and start to dump some of more than 12,000 billion in US debt , it can turn into more than a major rout. The declining dollar will repercussions around the globe. The rise in the Euro’s effective exchange rate has been almost as fast as that of the dollar’s fall.
Europe’s business and politicians - stung by low export efffectiveness - The European Central Bank will be reluctant to oblige. All those Asian countries that peg their currencies to the greenback - either explicitly or implicitly - also have a problem. China will either buy dollars even faster than present , unsustainable rate. or let the remninbi rise and take a huge loss on its existing reserves.
Forex Beginner Resource Center
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