Dollar Ends 2007 With A Thud

By Jason Simpkins
Associate Editor

Although some analysts believe the U.S. dollar is destined for a rebound in 2008, it ended 2007 with a thud. Indeed, in the final full week of the year, the greenback experienced its largest weekly decline since April 2006.

The dramatic dollar drop was prompted in part by a report from the Commerce Department which showed that November sales of new homes fell to a 12-year low, as well as to increased speculation that the U.S. central bank’s policymaking Federal Open Market Committee (FOMC) may again slash its key interest rate when it meets later this month.

"In the near term, the dollar probably remains on the weak side," Doug Smith, of New York’s Standard Chartered Bank, told Bloomberg News. "The weakness in the housing sector continued to weigh growth down and increased the likelihood of a rate cut in January."

Including last Friday, the U.S. dollar fell for six straight days, its longest losing streak since October, and it declined a total of 2.3% for the week. The greenback has fallen against 14 of the 16 most-actively traded currencies this year. That includes a 4.9% decline versus the Japanese yen, and a 10.3% drop against the European euro.

Meanwhile, the markets are being flooded with liquidity. On Dec. 18, the European Central Bank pumped $502 billion into the credit markets. The central bankers also signaled that they would continue pumping in capital "as long as necessary." Furthermore, U.S. Federal Reserve Chairman Ben S. Bernanke and the U.S. Fed have cut short-term interest rates at each of the central bank’s last three policymaking meetings, dragging the short-term benchmark down to 4.25%.

With the increasing likelihood of yet another rate reduction after the next FOMC meeting, the dollar could be in for even more trouble.

In a worrisome sidelight, a weak dollar spurs inflation, the insidious increase in the general level of prices in the economy, and a force that can be ruinous if not checked early.

And inflationary pressures appear to be escalating.

On a year-over-year basis, the consumer-price and producer-price indexes for November jumped to 4.3% and 7.2%, respectively.  Core price inflation, which excludes the historically volatile food and energy prices, has been on the march, as well. It jumped 2.2% for the year, piercing the Fed's 2% preferred maximum.
"The U.S. dollar is like a sore thumb getting hit with a hammer," Brian Dolan of told Bloomberg News.

In spite of the recent currency turmoil, some analysts believe the dollar will see better days in 2008.

"Once we see economic activity pick up by, say, [second quarter] next year, there will be some dollar strength coming through," John Ip of Morley Fund Management told Reuters. "We think the dollar is actually cheap now."

"The [U.S.] current-account deficit has found a floor," he added, "It has been improving for about two years now."

The dollar ended Friday with a 1.2% drop against the yen and a 0.65% drop versus the euro.

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