Treasury Secretary Henry Paulson's plan to end the rout in U.S. financial markets may derail the dollar's three-month rally as investors weigh the costs of the rescue.
The combination of spending $700 billion on soured mortgage-related assets and providing $400 billion to guarantee money-market mutual funds will boost U.S. borrowing as much as $1 trillion, according to Barclays Capital interest-rate strategist Michael Pond in New York. While the rescue may restore investor confidence to battered financial markets, traders will again focus on the twin budget and current-account deficits and negative real U.S. interest rates.
``As we get to the other side of this, the dollar will get crushed,'' said John Taylor, chairman of New York-based International Foreign Exchange Concepts Inc., the world's biggest currency hedge-fund firm, which manages about $15 billion.
Sept. 22 (Bloomberg) -- The dollar fell for the first day in three against the yen on speculation a U.S. government plan to buy soured mortgage-related assets from banks will widen the country's budget deficit.
The dollar traded near a two-week low against the euro on speculation the combination of spending $700 billion on mortgage securities and $400 billion to guarantee money-market funds may rattle investors' confidence in the U.S.'s ability to repay debt.
``Problems with the U.S. deficit will haunt the dollar,'' said Masanobu Ishikawa, general manager of foreign exchange at Tokyo Forex & Ueda Harlow Ltd., Japan's largest currency broker. ``This is a reason for the dollar to go lower. Spending such a large amount on this rescue package will remind traders that the fiscal health of the U.S. is set to worsen.''