American Housing Market Weakened The Dollar

The dollar exchange rate slid during the last week to the lowest level in the last three months.

The green currency lost 1.5 percent compared to the euro, which at the end of the week was trading at 1.3312 dollars. The dollar weakened more than two percent in comparison to the Swiss frank, and is trading at 1.2069 franks. The British pound jumped one percent to 1.942 dollars. The Yen rose by 1.3 percent, to 116.7 Yen for a dollar.

The financial markets are concerned about the ever growing problems on the American market of home loans and housing, which was supported by the ex governor of the American Central Bank, Alan Greenspan, warning on Thursday that problems in the sectors of home loans could extend to other sectors.

The American currency found itself under pressure from the information of sharp price increases from the manufacturers and the slowing growth of industrial production on the north east of the USA. They are considered a first sign that the USA may be heading towards stagnation, which means a zero level of growth and a high level of inflation.

“The dollar was under the pressure of Greenspan’s statements, the information from the New York branch of the Fed about industrial production in the north east of the USA, and there are obvious fears of inflation”, concluded Simon Derrick from the Bank of New York.

The exchange rate of the Yen stabilized compared to the dollar and euro in the middle of the week. This was after investors sought refuge amongst currencies with smaller income. They were concerned about the news about the number of home loans that people are unable to pay back, which in the last quarter of 2006 reached its highest level in the last three and a half years. There was also smaller than expected business in retail sales in February.

These signals from the USA have turned investor’s attention to the state of the American economy to see if the slowing of its growth will be strong enough to make the Fed lower interest rates this year. “The problem of unpaid loans is still concerning and scaring investors, who have again started to protect themselves from risk”, concludes Martin McMahon from Zurich’s Credit Suisse.

In March the German ZEW growth expectation index gave wind to the Euro by rising 5.8 points in comparison to the expected 3.3 points. That news spurred expectations that the European Central Bank (ECB) will raise interest rates again from the current 3.75 percent. The Euro was still under pressure from the signals from the ECB that after raising key interest rates to four percent in the following months, the campaign of tightening monetary policy may be at coming to an end.

Amongst the other currencies, the Swiss frank strengthened compared to all key currencies, after the Swiss central bank raised interest rates as expected to 2.25 percent, commenting that it could raise rates again in June.

Joining the trend in tightening monetary policy in the developed world, the Norwegian central bank raised its rates by 0.25 percent to 4.0 percent. That was also by the Latvian central bank on Thursday, so the rate for refinancing is up by 0.5 percent to 5.5 percent.