Saturday, January 3, 2009

It's Not Easy Being Greenback

The dollar is losing value on the Fed's quest to rescue the economy.

The Fed's quantitative easing, which is when the Central Bank floods the banking system with money to boost lending, may help get the economy back on track, but it's devaluing the dollar at an alarming rate.

On Tuesday, after cutting interest rates by 75 basis points, the Fed said that it would continue to buy up agency debt and mortgage-backed securities until lending loosened a bit.

"By indicating a willingness to, in essence, print more currency to buy assets of questionable nature, it is debasing the dollar by weakening its backing," wrote Ladenburg Thalmann analyst Richard Bove in a note to investors.

The dollar slid against most other currencies on Wednesday. The dollar no longer appears as a safe haven, hitting a 13-year low against the yen on Wednesday. The dollar fell to 87.45 yen toward the end of trading in New York, from 89.05 on Tuesday. The dollar fell 2.5% against the euro, its biggest one-day decline.

In the bond market, the yield on the 10-year benchmark Treasury note slid to 2.17%, from 2.37%, as investors continued to say the credit crisis isn't nearing an end. The iShares Lehman 10-20 Treasury bond (nyse: TLH - news - people ), an exchange-traded fund that tracks the sale of mature debt, gained 1.0%, or $1.19, to close at $121.88.

An interesting effect, however, was that demand is growing for 30-year Treasury bonds. The long bond, as it is known, was once the benchmark for the world market, but the United States stopped issuing them in the late 1990s as the federal budget was at or near balanced for a few years. After the Federal Reserve's Tuesday rate cut, which pushed short-term rates near zero (See "Fed Sends Stocks On Joyride"), investors are apparently looking to increase their returns, no longer showing any fear of inflation, which the Fed insisted wasn't a threat at the moment. On Wednesday, the 30-year bond jumped more than 2 points in price, trimming its yield to a low of 2.65%, from 2.72% late Tuesday.

America's tough times are reaching foreign shores. The U.S. current account deficit, a broad measure of international trade, shrank more than had been expected in the third quarter as American consumers, who for years had been supporting the world's exporters, reined in their purchases.

Maurna Desmond and Lisa LaMotta, 12.17.08, 05:30 PM EST


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