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17 Mar, 2008 09:12

Dollar’s value set to freefall

The action by the U.S. Federal Reserve to prop up America's ailing financial system and economy is having a profound effect on the value of the U.S. dollar.

Monday saw the dollar hit further lows against the euro and yen and, with the Fed expected to cut rates again later this week, analysts are expecting further falls for the greenback.

The Federal Reserve is pumping billions of dollars into the system, slashing key interest rates, and taking part in a bail-out of the like not seen in a generation.

But this spells bad news for the dollar. It has hit a record low against the euro and a 13-year low against the yen, sending dollar- denominated gold and crude futures to record highs.

Despite the slump, analysts do not see central banks dumping the greenback because this would only worsen the situation. However, several central banks have made statements about diversifying away from the dollar.

“The central banks are really worried about any impact on their own economies, so they are unlikely to add fuel to the fire by dumping the dollar at these levels. Certainly going forward what we are likely to see from most central banks is that they will continue to diversify from the dollar in their reserves,” added Kevin Dougherty, Portfolio manager of Pharos.

There is a ray of light for the U.S. economy. Every cent it drops, American exports become more competitive internationally and over time it could help turn around the current account deficit which is adding to investor nervousness.