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The US dollar poised to drop

23 January 2009 15:01 (UTC +04:00)

Builders have all but shut down construction projects as home values plunge and potential buyers remain on the sidelines of the troubled housing market.
The Federal Reserve has cut interest rates to record low levels of zero to 0.25 percent to try to revive the struggling economy and stem the losses in housing.
The pound suffered the most as the U.K. announced another banking-sector bailout package. That sent the pound to its lowest level in seven-and-a-half years at $1.3865.
The euro-zoneâ€™s biggest economy, Germany, said on Wednesday that its economy would shrink by 2.25 percent this year. And in France, a government official said that economic growth in 2009 would be almost nil, and that unemployment would likely rise.
The dollar-euro move is now more dependent on the volatility in stock exchanges rather than the ailing economy.
Grim news and fourth-quarter reports by major companies sent down international stock markets.
The rush for the dollar as a safe heaven in the desperate markets further strengthened the US currency.
The stronger dollar has come at a bad time. It made U.S. goods more expensive overseas as the economies of many major U.S. trading partners are mired in recession.
The drop in exports could lead to more job losses, at a time when employment is already declining at the fastest pace in decades.
Although the dollar strengthened against most other major currencies for much of the second half of 2008, it is going to reverse course because the stimulus package needs it. So, the dollar depreciation is imminent willy-nilly in order to allow the recovery plan to work. For this reason, the dollar is expected to drop versus he euro in February-March.
In a broad sense, a weak dollar is probably favorable while the economy is ailing, since it would make U.S. goods cheaper to consumers outside the country. Meanwhile, not better reports in the European economy prevent the 16-nation euro to be a reserve currency.
The dollar-euro move will willy-nilly manifest itself the manat-euro and manat-dollar moves in Azerbaijan.
Because the exchange rate policy is based on the two-currency basket in the country, it is hard to predict how the dollar trend will go.
Interestingly enough, given that the dollar strengthened 6.7% against the euro on the world markets since January 1, the US currency rose only 0.5% and the euro fell 6.3% against the manat.