Tuesday, Sept 23, 2008
Short-term pressure on the U.S. dollar will subside as the government’s efforts to prevent a prolonged recession support the currency amid a slowing global economy, wrote Morgan Stanley currency strategist Stephen Jen.
While U.S. interest rates may rise as the Treasury sells debt to raise $700 billion to fund its purchase of soured mortgages and other problem loans on bank balance sheets, much of that may be recouped, mitigating the risk to the currency, Jen wrote in a note to clients published today.
The currencies of countries participating in banking system bailouts since the late 1980s have not depreciated from the efforts, Jen wrote, citing the U.S. Savings & Loan Crisis, Japan during the early and late 1990s and Norway in the early 1990s.
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“Banking crises are unambiguously bad for currencies but nationalization per se is not bad for currencies,” Jen wrote. “In fact it often marks the low in the currencies.”
The note did not revise Morgan Stanley’s estimates for the dollar.
The $700 billion investment in securities such as subprime mortgages will weigh on the dollar to the extent the government loses money on the transaction, wrote Jen, who did not immediately return a call seeking comment.