Henry Paulsons plan to rescue the financial institutions tied with the illiquid mortgage assets will not only cost U.S. $1 trillion of tax-payers money, but it may also end the dollars rally that was rocking the Forex market since mid July.
The plan will require about $700 billion to buy out the troubled assets from the banks and other financial institutions and also $400 billion of additional liquidity to eliminate the hunger for money on the markets. If this plan gets full approval it will not only save the financial system, it will literally flood the markets with the cheap dollars.
Providing such huge funds to the market will significantly increase the budget and current-account deficits, while making the real U.S. interest rate negative. Boosted public debt will trigger huge sales of the U.S. treasuries and will press on the dollars rates against other currencies.
Today U. S. dollar continued to fall against the major world currencies. Even problematic British pound rose against the greenback, despite the slide of the home prices in U.K. Australian and New Zealand dollars remain the only major currencies in the neutral zone against the U.S. dollar today.
EUR/USD rose from 1.4490 to 1.4581 as of 8:37 GMT today, reaching the maximum level since September 1. GBP/USD advanced from 1.8325 to 1.8409 — the highest rate since July 27. USD/JPY opened at 106.87 today and is now trading near 106.35 level.
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