Why the dollar will keep falling !!!!!!!!!!!

[Daanyeer]

Source: moneyweek.com
November 8, 2007 Author: John Stepek

What a day.

The Dow Jones dived by 360 points, while the dollar hit fresh lows against sterling and the euro. Meanwhile, oil clawed even closer to $100 a barrel, and gold almost hit its all-time high (though not if you adjust for inflation) of $850 an ounce.

What’s going on? Where to begin…

There was a lot to worry about yesterday.

On the one hand, the US is running further into trouble. The sub-prime crisis is escalating rapidly, with investment banks expected to announce further write-offs this quarter. Morgan Stanley is set to take a $3.7bn hit in the fourth quarter, but this could go up to $6bn if all its sub-prime investments go bad, says The Telegraph. Meanwhile, the SEC (the US equivalent of the FSA) is investigating Merrill Lynch over the way it handled its sub-prime portfolio.

None of this is good news for the dollar – but to rub salt in the wound, a high-ranking Chinese official, Cheng Siwei, said it would be better for China to have “a better match” between the rising euro and the falling dollar. The spectre of China shifting some of its massive currency reserves out of dollars has been hanging over the US currency for years now, but it looks like all the concerns are coming to a head at once.

Unsurprisingly, the dollar dived to a fresh 26-year low against sterling, which breached the $2.10 barrier, while it hit another record low against the euro, which went above $1.47 for the first time. Gold meanwhile hit $846 an ounce, while oil went above $98 a barrel in the US.

Of course, rising oil and rising gold tend to point in one direction – inflation. And for all the talk of rampant speculation in the oil market, a rather gloomy report from the International Energy Agency yesterday confirms that supply and demand justifies the higher oil prices.

The IEA reckons that oil could hit $159 a barrel by 2030, with demand of 120m barrels a day far outstripping supply of 116m barrels a day. And this is assuming we can get supply that high – it’s currently just 85m barrels a day, and if you believe in the Peak Oil theory, then it’s not going to go much higher than that.

In any case, Simon Derrick at Bank of New York Mellon sums up the problem succinctly: “The Fed is caught between a rock and a hard place. It can’t keep rates high enough to fight inflation because of the sub-prime crisis.”

Everyone knows it, and everyone believes that the Fed will ultimately choose inflation and a weak dollar over a massive recession. So the only way for the dollar is down, and the only way for gold is up.

But what about over here? Our own Bank of England makes its interest rate decision today. I imagine it will keep rates on hold – we haven’t seen enough evidence of an economic slowdown for the Bank to cut rates yet, and with food and fuel prices soaring, Mervyn King will be mindful of inflationary pressures in the background.

However, the UK’s growth prospects are looking bleak. Another expert has decided that the housing boom’s days are numbered. Credit checking group Experian reckons that house prices will rise by an average 1.2% a year over the next two years, with prices falling by 3.7% - 4% in the Midlands and by 2.8% in the South West. How they can be so sure as to include decimal points in those calculations, we don’t know.

As with all the experts so far, they argue that there will be no “calamitous crash”. Everyone says this - but then up until very recently, most experts were also arguing that commercial property prices would stabilise, but not fall.

However, a recent report from Capital Economics suggests that - while valuations are uncertain in such an illiquid market - commercial property prices may have fallen by as much as 10% year-on-year already.

So much for the experts.

And as our regular commentator James Ferguson has been saying for a while, both in MoneyWeek and in his Model Investor email service, buy-to-let has the potential to make this particular housing cycle far more volatile. James’s argument - which makes a lot of sense to me - is that buy-to-let investors have replaced the traditional first-time buyer as the new blood on which the property market depends.

But now it’s getting much harder for new buy-to-let landlords to enter the market. The Royal Institution of Chartered Surveyors said yesterday that buy-to-let is becoming a “rich man’s game.” A typical prospective landlord now needs a 30% deposit to meet lending criteria. Given average house prices, that means stumping up £65,600, up 500% on 2002.

With fewer buy-to-letters entering the market, and the ones who are already there either losing money on their rentals, or looking to take profits as capital growth dries up, there could well be a rush for the exits which wouldn’t normally be seen when owner-occupiers dominate a market.

[Gifted]

So when are we gonna start making babies