Dollar May Move Off Lower Rates

Over the last two weeks U.S. based mortgage rates have dropped from an average 6.8% to 6.1%, the first time this year that they have fallen and held those new levels without suffering the quick reversal that most previous moves lower have seen. "Traders may be able to correlate the mortgage rate with dollar moves over the coming weeks and months" said Jack Jones, senior commodity analyst at TheLFB-Forex.com. "The real leg of sustainable dollar moves higher may therefore be seen first in the 15 and 30 year mortgage rates coming down" he added.

That move lower may be easier to sustain now that the two largest U.S. based mortgage lenders have U.S. Treasury backing to go about their business in the near-term. The Fannie Mae and Freddie Mac corporations have shed the responsibility to shareholders it seems, and that may allow them to initiate a lending policy that creates market liquidity and generates a new flow of new lines of credit, for those able to qualify under the tighter lending criteria.

"To create economic expansion, or at least to ensure that the current situation does not deteriorate, the Treasury looked to have no real choice but to step into the two entities and bail them out. It is just the same as the Federal Reserve having absolutely no choice at all but to stimulate the consumer, with an example being the Stimulus Checks, albeit a move that the Fed accepts may have a short-lived impact" said Jones. "A sustainable consumer-lead stimulus really can only be achieved by a reduction in mortgage rates, and ideally from the Fed's point of view, via the inter-bank passing along the recent 325 basis point cut in the overnight rate, that up until now has achieved just one thing; the stability of the financial sector" he added. Home owners have seen little, if any, of the rate cuts that were imposed by the Federal Reserve this year, and the spread between overnight lending rates and average mortgage rates currently stands at 4.0%, a huge premium that added to new lending criteria is making it hard for U.S. consumers to pick up the slack in the housing inventory numbers. The move from the Treasury, although maybe forced, could support the recent dollar buying.

If banks start to offer lower mortgage rates, and the U.S. consumer starts to get back into debt, the Fed may be able to move on from the threat of having to cut rates to achieve growth, and concentrate on the four mandates that it was put in power to achieve, they are:

1. Conducting the nation's monetary policy by influencing the monetary and credit conditions in the economy in pursuit of maximum employment, stable prices, and moderate long-term interest rates
2. Supervising and regulating banking institutions to ensure the safety and soundness of the nation's banking and financial system and to protect the credit rights of consumers.
3. Maintaining the stability of the financial system and containing systemic risk that may arise in financial markets.
4. Providing financial services to depository institutions, the U.S. government, and foreign official institutions, including playing a major role in operating the nation's payments system.

"Once the Federal Reserve has those four mandates in place the economy can more easily grow, albeit off ever increasing private and public debt levels that look to have little or no chance of being paid off. The markets will then look forward to the boom part of the boom and bust cycle, and ignore the underlying fundamentals to the greater degree” said Jones. The U.S. is moving the Peak to Trough, back to Peak in its business cycle in about half the time that global regions are moving through theirs, and the reason may be the mountain of debt that does not allow for sustainable expansion without massive doses of overseas debt.