Thursday, April 28, 2011

US recovery fears causing dollar's value to crumble -- is a currency crisis fast approaching?

The pound touched a 17-month high against the dollar as the world's reserve currency slumped on fears about the US economy's recovery.

Slower-than-forecast growth figures from the US reinforced expectations that the Federal Reserve, its central bank, will have to keep interest rates low to avoid choking off the recovery. The data compounded the fall in the dollar after comments from Ben Bernanke, its chairman, signalled the same.

Markets were prepared for his press conference on Wednesday to indicate that June would mark the end of the Fed's quantitative easing (QE) programme - buying bonds in order to pump money into the economy. But traders reacted to his markedly "dovish" tone - suggesting a leaning away from higher interest rates - as Mr Bernanke warned the jobs market was still in a "very, very deep hole". Tighter monetary conditions are not imminent, they judged.

Tightening - in the form of an interest rate rise - generally strengthens a currency, as demand for it increases as people seek to take advantage of the increased rates of return offered by debt held in that currency. Conversely, low interest rates would normally weaken a currency.

The dollar's fall saw the pound rise to $1.6711 on Thursday, before closing up more than a cent higher at $1.6648. Investors looking for a refuge from the greenback also pushed up the price of gold - seen as a safe haven - to a new high of $1,535.90 an ounce.

"At this juncture there is nothing much to support the dollar," said Kathleen Brooks, research director at trading platform Forex.com. "The Fed aren't helping." (read more)