Sunday 21 September 2008

Fears of Dollar Being Hit by Washington’s $700bn Bailout Plan

THE SUNDAY TIMES: THE US Treasury’s $700 billion (£380 billion) plan to bail out the banks could undermine the dollar, economists warn.

The plan, details of which were unveiled yesterday, will seek congressional approval to raise the total amount the US government can borrow from $10.6 trillion to $11.3 trillion.

It also gives Hank Paulson, the US Treasury secretary, immunity from legal challenge under the plan. The US Treasury will buy mortgage-related securities “from any financial institution having its headquarters in the United States”, draft legislation said. Securities issued before September 17 will be eligible for inclusion.

Word of the proposals created a mood of euphoria in financial markets on Friday. But analysts warned of the risks.

Tim Bond of Barclays Capital, while conceding that the rescue was necessary to avoid the risk of depression, said: “The volume of fresh government borrowing and the fast expansion of the Fed’s balance sheet are both negatives for the dollar, carrying a potential risk of increased inflation.”

Other economists also think that the dollar could be undermined. Kenneth Rogoff, former chief economist at the International Monetary Fund and now a professor at Harvard, said: “It is hard to believe that the dollar will continue to stand its ground as the crisis continues to deepen.” Fears of Dollar Being Hit by Washington’s $700bn Bailout Plan >>> By David Smith, Economics Editor | September 21, 2008

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