US Dollar still sinking

From the department of slower-than-the-titanic:

The US dollar has fallen to a record low against the euro as investors bet that the Federal Reserve will cut interest rates to help the economy.

At its nadir in European trading, it took $1.3914 to buy a euro, passing the last record of $1.3852 set on 24 July.

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At the heart of the dollar's decline have been problems in the US housing market, caused by the Fed increasing interest rates in order to slow accelerating inflation.

As a result of the higher borrowing costs, an increasing number of borrowers have defaulted on loans, especially in the sub-prime mortgage market, which specialises in lending to people with poor or non-existent credit histories.

This, in turn, has spread to global credit markets, as many of the sub-prime mortgages were repackaged and sold on to European and UK banks as investment assets.

Analysts are now speculating that the Fed will cut its main interest rate to ease the pressure on consumers, and help reassure the global markets that it is willing to intervene to ensure financial stability.

The Fed's main interest rate is currently at 5.25% and any cut would be the first in four years.

This is part of the "perfect economic storm" that I forecast back in 2005. Put simply, the current subprime meltdown has enough momentum to, at the very least, reduce US economic growth significantly. The high oil price - which has now gone past US$80.00 for the first time - would be enough to throw the US into a recession. A sinking dollar - which causes inflation and may force the Fed to raise interest rates during a recession - is enough to make the coming recession worse than the one in the early 1980s. Moreover, the US government's budgetary problems and deficits will ensure that any recovery will take a long time.

Basically - we can expect a recession soon. We may be in one already. And it will take a long time to recover from it.