There is no relief in sight for the sliding dollar, which is at record lows of almost $1.50 against the euro.
Further US interest-rate cuts are expected as the economy worsens, while signs that China and other Asian and Middle Eastern countries are less likely to prop up the dollar in future are eroding confidence in its status as the world’s reserve currency.
The “latest scare” in this context is that the Gulf states may now loosen their ties to the dollar, “depriving the foreign-exchange markets of a reliable buyer” of the ailing currency, says The Economist.
Having tied their currencies to the dollar, they are importing US rate cuts, which have led to a rapid rise in inflation. Some Gulf states could follow Kuwait’s recent move and peg to a basket of currencies, a shift implying lower demand for dollars. Longer term, “all roads point south” for the dollar, says Neil Mellor of Bank of New York Mellon.
The same could be said of sterling, which has slid to a four-and-a-half-year low against the euro and lost around 7% against the yen in the past fortnight.
Falling global risk appetite has dented the carry trade of late, boosting the yen and hitting high-yielding currencies. But fears of slowing UK growth – with Britain deemed more vulnerable to the credit crunch than other European economies, due to its reliance on the financial sector – are also hurting the pound; rate cuts are now being pencilled in.
In addition, Britain has similar problems to the US: a large current-account deficit and a housing market looking vulnerable to a nasty slide. By early next year, says HSBC’s David Bloom, sterling will be sliding against the dollar too.