Government Bailout Will Lower Dollar?s Value in Short Term: Economist

The U.S. government announced over the weekend plans to buy $700 billion in mortgage debt. While lenders are eagerly awaiting the opportunity to remove toxic debt from their books, what the bailout will mean to the value of the dollar and consumers’ ability to lend and pay down debt remains a mystery.

“The dollar is one of the most difficult variables to forecast,” Dan North, chief economist for leading trade credit insurer Euler Hermes ACI, told insideARM.  North said if the bailout inspires more confidence in the U.S economy and global markets, the value of the dollar could increase in the short term. However, the dollar’s value could fall if the market doesn’t understand how the bailout will work and what it means to consumers. 

In the short term, North sees the value of the dollar dropping and likely to continue falling for two reasons. The Federal Reserve is expected to cut the discount rate, the amount the Fed charges banks to borrow money. Also, the U.S. government will have to borrow money to pay for the bailout, which will increase the federal deficit.

“Countries with large deficits tend to have weaker currency,” North said. 

While credit conditions will loosen for business and consumers as the government takes ownership of lenders’ bad mortgage debt, interest rates on five and 10 year treasuries will increase because demand for funds increase, North said.  As a result, consumers seeking new loans for automobiles and home mortgages can expect to pay more.  

The bailout is supposed to relieve conditions in credit markets and all credit markets are related,” North said. “Credit card (rates) will be slower to move. They seem to be a bit stingier (with lower rates) than other lenders.”