Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Gold/Mining/Energy : Gold Price Monitor -- Ignore unavailable to you. Want to Upgrade?

To: Mark Bartlett who wrote (21179)	10/8/1998 11:26:00 PM
From: Alex	Respond to of 116767

America's cash crisis rocks world Mark Milner and Larry Elliott consider the wider implications of the greenback's fall from grace Friday October 9, 1998 When the world's most powerful currency takes a bath two questions present themselves: why did it happen and what does it mean for a global economy heading for the buffers? There are three reasons behind the dollar's plunge against the yen - down 20 to 116 this week. First is the cut in US interest rates and Wednesday's hint by Federal Reserve chairman, Alan Greenspan, of more in the pipeline. Second, and more important in terms of the huge wave of dollar selling, has been the role of hedge funds, demonstrating yet again their ability to destabilise global financial markets. Many had borrowed yen to buy US government bonds. But amid mounting losses they are selling their dollar assets to buy the Japanese currency back to settle their original debts. In the City yesterday it was rumoured that one hedge fund had liquidated a $10 billion (£6 billion) position to square its books. The third reason is that the dollar was overvalued, given that the US trade deficit is heading for a record figure of $250 billion this year. "The dollar has been a classic bubble stock and now the bubble has burst," said Graham Turner of Tokai Bank Europe. The dollar's tumble could trigger an even wilder bout of panic selling. While investors believed in America's "new paradigm economy", in which growth could be high and inflation low for ever, they would bet heavily on US assets in general and Wall Street in particular. This drove the dollar and American shares ever higher. The stock market boosted growth by fuelling "feel-good" consumer spending while the stronger dollar made imports cheaper and kept the lid on inflation - a virtuous circle. Once the Wall Street bubble burst, the virtuous circle became a downward spiral. The full horrors will only unfold over the coming months. Policymakers will be sweating that the dollar's rapid fall does not force one or more hedge funds to go belly up - a real possibility given the sheer scale of market movements, especially as many funds will have been banking on the yen going to 150 against the dollar. Worries about the health of the financial system, highlighted by the fall of Long-Term Capital Management, will make banks even more reluctant to lend; the classic mind-set for a credit crunch. Yesterday bond yields were rising, making long-term debt more expensive at a time when the world's economy is slowing down. A cheaper dollar will add to the manifold economic woes of Japan where only the export sector is showing any real sign of life. Not only Tokyo felt the fallout. Shares in big exporting companies in Europe also slumped, depressing stock markets from Stockholm to Amsterdam. There will now be even more pressure on policymakers to stop the rot. The most obvious response will be to lower interest rates in the US and in Europe. reports.guardian.co.uk