Sunday, January 18, 2009

Global Financial Crisis - Effects On USD

Global Financial Crisis - Effects On USD

In a context where there is a pace of growth slowed, it becomes evident that the continued weakness of the dollar against major currencies. Know what the implications will stage worldwide in emerging countries and in Argentina
The global financial crisis further weaken the dollar

The impact of the housing bubble on the financial system was so significant that although the Federal Reserve of the United States (EDF) to continue injecting liquidity and lowering rates, it is unlikely that the current credit restrictions dissipate quickly.

Indeed, for many, the sensation of heat is that the U.S. economy continued to deteriorate. In that sense, M & S Consultants, says in its latest report that the market can not remove the head of the confluence of negative elements that started the year (hikes in fuel prices and food, real estate deflation, complications of credit, financial turmoil, low employment and inflation on alert).

Millions in losses
According to the latest report published by the consulting Ecolatina, losses announced by banks in the second half of 2007 reached U.S. $ 52,000 s for the Americans yu M $ 35,000 M s for European banks. (See: Citigroup suffered the biggest loss in its history: nearly U.S. $ s10.000 M)

While it is still premature to determine the exact figure, analysts speculate that the total losses could be located between 200,000 and 300,000 million dollars. It is not unreasonable to anticipate that in this context, the mood of investors will remain very volatile in the coming months and that the uncertainty surrounding the financial market will remain very high.

Lower growth
If this pressure is compounded by the negative wealth effect arising from the collapse of housing prices in the U.S., the result will be a very low GDP growth in the world's largest economy during 2008, which many analysts see below 2%.

But the focus of the problem is concentrated in the first part of the year, as there is consensus that during the first half the pace of expansion will be located around 1% as a result of credit restrictions, the continued decline in the home prices, high commodity prices for energy and a very limited rise in domestic consumption (there is consensus that the slowdown would have been heightened between December 2007 and early 2008).

Therefore, threatened by recession, the financial market already discounted the Fed in the U.S. (EDF) announced a drop of at least 50 pb at the next meeting on January 31. Although in recent days a growing consensus on a low and might even reach the 75 pb

Moreover, many banks and analysts and evaluated the possibility that after this reduction, the reference rates in the U.S. are located below those set by the European Central Bank (ECB). In other words, the interest rate that applies to the dollar could fall below that which governs the European currency.

But fears of a recession, there is an additional factor: the year 2008 is in the U.S. presidential election, so there will be greater official concern to reduce the costs of the crisis in terms of jobs.

Recession stalking andalusia
"The U.S. economy is already in recession or close to it, "he dared to say Alan Greenspan, former head of the EDF, in an interview with the Wall Street Journal. His words were the trigger to destroy all world markets.

In the same vein, a report on global risks, submitted days ago in London by the World Economic Forum in Davos (Global Risks 2008), also about the possibility of a recession in the U.S. economy for the next twelve months, with the prognosis matching Merryl Lynch and Goldman Sachs in its latest published reports.

"Investors are increasingly convinced that consumption will decrease, leading to a recession, since it represents two thirds of U.S. economic activity," he explained to AFP analyst Al Goldman.

Low rates and weak dollar
Different analysts consulted by agree that a scenario of low rates and low growth rate also means that:

* The continued weakness of the dollar relative to major currencies.
* The euro may reach a maximum of $ 1.55 s mid-year, slightly above the current level (u $ s 1.45 / 1.49).
* The prices of major commodities would be upward pressure, given the weakness in the benchmark for excellence, which is the dollar.

China ensures much of the growth of emerging
In recent years, China has become one of the main proponents of the global economy and is particularly important in the commodities market.

* In just ten years, imports of primary products, including fuel, rose eight times.
* This phenomenal rise prompted a hike in the international price of these goods from more than 135%.

These values are more than eloquent to say that the future of the economies of exporting raw materials is tied to what happens with China.

If completed as expected cooling of the U.S. economy during the first half of the year, it is estimated that the impact on China's economy will only be marginal, since fall of 10.5% to 9.5%.

* In terms of impact on the price of commodities, is expected to demand China to continue with the current rates of expansion.
* Moreover, considering the dynamics of domestic consumption, the Chinese government implemented an increase in withholding taxes on wheat, corn, rice and its derivatives earlier this year which will add additional pressure to prices.

With this perspective, it is easy to conclude that China's strong growth in emerging countries will cushion the impact of a sharp U.S. slowdown.

The impact on Argentina
Arise in this context important implications for emerging markets in general and Argentina in particular.

* The slowdown in the U.S. economy and the lower dynamism of the economies that make up the Eurozone scheduled for 2008 are not promising for our economy.
* By contrast the world, especially China, India and Russia remain very seekers Argentine products. Supports this theory that the growth in prices of major commodities exported by Argentina does not answer but only for transient structural changes in global demand.
* It is expected that the elements that drive the consumption of these products will be maintained in the medium term and even increase, generating further increases in contributions.
* In this context, the reduced demand from the U.S. Argentine products would be affected, but mainly in trade in manufactured home industry, as foreign sales of fuels and energy depend essentially internal (energy shortage) and Strong global demand for primary products and manufacturing of agricultural origin guaranteed placement.
* Another important factor for the Argentine economy is the sustained weakness of the dollar. In 2008, the U.S. currency continued ceding ground with respect to other currencies but at a slower pace.
* While awaiting a sharp appreciation of the real exchange rate in relation to the U.S. (around 11%), loss of competitiveness will be reduced (7%) as the strengthening of the Euro and the Real-as in 2007 - will moderate the loss of competitiveness.
* Finally, from a financial point of view, although the EDF is expected to make a significant reduction in fees, yet weigh important sources of uncertainty that foster greater risk aversion on the part of international investors (magnitude of losses financial system, depth of the crisis, the risks of recession, etc.).

Since the beginning of the decade the internal conditions of the emerging countries were strengthened, and this acts as a defense against any external shocks. This is reflected in its current account surplus in the accumulation of international reserves and reduced requirements for funding as a result of the policies of debt cancellation and increased tax savings.

Its the decline in interest rates in the U.S. bring relief to the financial commitments from emerging economies, this does not necessarily imply a favorable scenario for placing new debt.

For this scenario to be attractive again, it will be necessary to normalize the situation and reduce the U.S. financial uncertainty is the extent of it. To which the response should join the EDF to the crisis. Only met these conditions, it is foreseeable that regenerate a good scenario for capital flows back to favor emerging assets.

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