Mortgage Meltdown: Central bankers with Blinders

EDITOR’S NOTE: As long as Central banks focus on the currency instead of the cause, these measures will at best delay an inevitable collapse. At the core of the problem is that unless people are kept in their homes, trillions of dollars of assets will fail. This is NOT an inevitable consequence. Plans abound to keep people in their homes, provide a foundation for recovery of these assets, and stabilize currency and the credit markets. It is much simpler than what they are making it. The only inevitable consequence is that if central bankers maintain their current course, the ripples will spread to doubt about the more than $500 trillion in Global derivative securities, many of which are solid.

CURRENCIES

Dollar under pressure after Bank of America misses

Pound pressured as Bank of England details swap plan

By William L. Watts, MarketWatch

Last update: 11:19 a.m. EDT April 21, 2008

SAN FRANCISCO (MarketWatch) — The dollar extended losses against most major counterparts Monday, after Bank of America Corp.’s earnings shortfall reminded investors that the U.S. financial sector is not out of the woods yet.

Bank of America Corp.’s first-quarter profit fell 77% as credit-loss provisions jumped $4.78 billion, driven by weakness in home-equity loans as well as credit extended to small businesses and home builders. See full story.

Hawkish comments from European Central Bank Governing Council member Axel Weber also supported the euro. Weber reportedly said inflation is likely to remain elevated and suggested the ECB might have to hike rates.

“Hawkish ECB rhetoric has underpinned the euro of late, though with the pairing so far unable to post new record highs, and the market seen as a bit overextended on the long side of the ledger currently, downside potential may be on the rise in the near term,” wrote currency analysts at Action Economics.

The dollar bought 103.25 yen, down from 103.47 yen in London earlier Monday, and the euro was at $1.5915, up from $1.5864. See real-time currency prices.

The dollar index, which tracks the greenback against a basket of six major currencies, was at 71.650, down 0.5%.

But the British pound sterling was under pressure itself, after the Bank of England announced details of a plan to let commercial banks use mortgage-backed securities as collateral for loans in an effort to thaw frozen credit markets. The pound was last trading at $1.9808, down from $1.9825 in London earlier Monday.

The pound fell prey to profit-taking, after the Bank of England announced details of a plan to let commercial banks use mortgage-backed securities as collateral for loans in an effort to thaw frozen credit markets.

If the effort manages to unclog credit markets it would presumably remove some of the impetus for aggressive cuts in response to tightening credit conditions, said Trevor Williams, chief economist at Lloyds TSB.

Commercial banks can tap the Bank of England over the next six months for around 50 billion pounds ($99.85 billion) in Treasury bills by swapping AAA-rated mortgage-backed securities. The swaps are set to last a year and can be renewed for up to three years. See full story.

Strategists said profit-taking pressures in the wake of the BOE announcement contributed to sterling’s softer tone.

The currency was buoyed late last week in anticipation of the program, briefly re-touching the $2 level against the greenback while sending the euro back below 80 pence after the single currency notched new all-time highs above that level.

Meanwhile, another house price index showed further weakness in the U.K. housing market. Rightmove said annual house price inflation, without seasonal adjustments, slowed to 1.3% in April from 5%, the slowest pace since July 2005.

The dollar was also buoyed late last week as equity markets gained ground after massive first-quarter losses by U.S. banking giants Citibank and Merrill Lynch weren’t any worse than expected, strategists said.

Still, the euro found support against the dollar after slipping into the low $1.57 area Friday, noted economists at KBC Bank. And the hawkish tone maintained by European Central Bank officials in the face of surging inflation pressures is likely to continue to make traders reluctant to press the dollar lower, they said, while a break above $1.60 will be difficult to achieve without help from weak economic data or another round of bad news from the credit markets. 

William L. Watts is a reporter for MarketWatch in London.

 

2 Responses

  1. […] of the problem is that unless people are kept in their homes, trillions of dollars of assets willhttp://livinglies.wordpress.com/2008/04/21/mortgage-meltdown-central-bankers-with-blinders/Smaller banks pay for boomtime expansion The York DispatchPHOENIX — Pennsylvania’s Sovereign […]

  2. […] floodgatedesigns wrote an interesting post today onHere’s a quick excerptEDITOR’S NOTE: As long as Central banks focus on the currency instead of the cause, these measures will at best delay an inevitable collapse. At the core of the problem is that unless people are kept in their homes, trillions of dollars of assets will fail. This is NOT an inevitable consequence. Plans abound to keep people in their homes, provide a foundation for recovery of these assets, and stabilize currency and the credit markets. It is much simpler than what they are making it. The only inevitable consequence is that if central bankers maintain their current course, the ripples will spread to doubt about the more than $500 trillion in Global derivative securities, many of which are solid. CURRENCIES Dollar under pressure after Bank of America misses Pound pressured as Bank of England details swap plan By William L. Watts, MarketWatch Last update: 11:19 a.m. EDT April 21, 2008 SAN FRANCISCO (MarketWatch) — The dollar […] […]

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