What Will the Fed Do About the Sinking U.S. Dollar?

The U.S. Federal Reserve has a meeting scheduled for Tuesday, but with recent developments such as Bear Stearns’ (BSC) woes and continued turmoil in the financial system, the Fed clearly did not want to wait any longer before stepping in again.

In a rare move, on Sunday it announced that it would make liquidity available to primary dealers like brokerages, who are not currently eligible for direct loans from the central bank. The Fed also cut the discount rate by 25-basis points to 3.25%, while its base rate is also expected to be reduced at the meeting in order to bolster credit markets.

In a note to clients, Scotia Capital strategist Camilla Sutton said:

Clearly the Fed felt that waiting one extra day for their scheduled FOMC meeting would be waiting too long. That is a scary thought with significant financial and main street consequences.

On Sunday, Bear Stearns, America’s fifth-largest securities firm, agreed to be sold to rival JPMorgan Chase (BSC) for $2 per share, or roughly $240-million. In November 2007, it had a book value of $84 per share. The Fed also stepped in here, agreeing to fund up to $30-billion of Bear Stearns’ less-liquid assets.

Given the loss of confidence that continues to plague the market, the Fed has very little left to do, Ms. Sutton said. It has promised to provide liquidity and will continue to aggressively cut rates, but the impact of counterparty risk has hit a new high and fears that others will be affected are legitimate, she added.

As a result, the threat of a U.S. dollar crisis is becoming “increasingly real,” which may lead to a coordinated intervention by central banks, Ms. Sutton said, adding that the greenback likely has further to fall.

Comments

[flow5]

You can't stop the fall in the exchange value of the dollar. The U.S. must sell higher quaility & lower cost, goods & services. It can't be done.