- The Washington Times - Friday, March 14, 2008

Global markets gyrated wildly yesterday on signs that the U.S. economy and mortgage markets continue to unravel despite strenuous efforts to revive them.

The dollar hit new lows, falling below 100 yen for the first time in 12 years, sending oil and gasoline prices to record highs and driving gold prices above $1,000 an ounce for the first time. Credit market turmoil resumed amid a massive liquidation of mortgage assets by the Carlyle Capital Corp. and other hedge funds that made losing bets on prime mortgages.

Investors in the U.S. and abroad were stunned by news of another big drop of 0.6 percent in retail sales last month as overstretched consumers, fearful of recession and weighed down by the rising cost of necessities, dramatically pulled back spending on everything from cars and gasoline to restaurants and groceries.

“It’s been a long time since anyone has seen so many things go wrong at the same time,” said Bernard Baumohl, managing director of the Economic Outlook Group, who just returned from a trip overseas where foreign investors expressed grave worries about the U.S. economy and markets.

“The U.S. is struggling with a real crises of confidence in the credit markets, one that is having global ramifications. Adding to these concerns is the growing sense that the Federal Reserve is unable to easily and quickly rectify the structural problems that now plague banks and securities firms,” he said.

Oil’s inexorable march past $110 a barrel is provoking anxiety overseas as well in the United States, he said. “Many wonder if growth around the world is about to come to a screeching halt as a result” of the high fuel prices and a likely U.S. recession.

“Given all this uncertainty, it’s hardly a surprise that the dollar is in free fall and that gold has crossed $1,000,” Mr. Baumohl said he has assured investors here and abroad that the Fed’s deep rate cuts and infusions of cash into the financial system are the right medicines, “but it will take time for these policies to turn the economy around.” He doesn’t expect to see improvement until next year.

“This should have been a good week” because of the Fed’s massive $200 billion infusion into mortgage markets on Tuesday, said Steven Hull, currency analyst with Lehman Brothers, noting that the move was “reasonably aggressive” and “aimed at easing the intense pressure in global credit markets.” The Fed’s action initially provoked the biggest rally on Wall Street in five years.

Yet within hours, the rally “had already fizzled out on a combination of surging oil prices, a plunging dollar and persistent credit market stress,” Mr. Hull said. “This trend of diminishing returns from Fed [actions] should be alarming, but unfortunately, not surprising,” given “stubbornly high global inflation” and the likelihood that the U.S. is already in recession.

Mr. Hull expects the dollar to fall further before recovering. He predicts it will drop to 95 yen or below by July. At some point, the currencies and economies of Europe, Japan and other countries will weaken substantially because of contagion from the U.S., which will provide relief to the dollar, he said.

“The longer this credit-driven crisis persists, the greater are the risks of an impact on the global economy,” he said.

President Bush and Treasury Secretary Henry M. Paulson Jr. made an effort to defend the dollar yesterday, to no avail. Mr. Bush told PBS’ “Nightly Business Report” that he “absolutely” wants a strong dollar, while Mr. Paulson said he believes “very much that a strong dollar is in our national interest.”

But markets ignored the remarks because dollar investors doubt that the administration can do much to prop up the currency, said Lawrence Kudlow of Kudlow & Co.

“Nobody in the administration is happy with the price of oil or gold,” he said, but the administration is by necessity focusing its efforts on addressing the housing and mortgage crisis right now. Yesterday, Mr. Paulson outlined credit market reforms the administration is advocating.

“Fixing this mortgage mess is important,” but “I’d like to see some dollar diplomacy” as well, to put a brake on the dollar’s rapid decline, Mr. Kudlow said. “Alas, none of this appears likely in the foreseeable future. … Right now, traders are fearlessly shorting the greenback and making good money doing it.”

Economists said the dollar’s weakness is reflecting growing evidence that the U.S. is in recession, including the Census Bureau’s report yesterday of a 2 percent inflation-adjusted drop in retail sales in the past year. U.S. stock indexes dropped early yesterday on the news but recovered by the end of the day on hopes of a recovery in mortgage markets.

“U.S. consumers appear to have finally capitulated,” said Joseph Quinlan, chief market strategist at Bank of America Corp. “Credit contagion is sucking the life out of the U.S. markets and economy,” he said. “Once a subprime mortgage problem, the credit meltdown has spread to virtually all parts of the credit markets, touching credit cards, car loans, student loans” and commercial mortgages.

Among the hardest-hit areas of consumer spending seen in yesterday’s report were big-ticket purchases usually financed with credit, including cars, home furnishings and appliances.

“An economy that lives and breathes on credit seems to have seized up, and there’s not much relief in sight,” Mr. Quinlan said.

HIGHS AND LOWS

The dollar fell below 100 yen for the first time since 1995 yesterday, helping push oil prices to record highs and drive gold prices above $1,000 an ounce. Volatile markets worry consumers, who curtailed spending and sent retail sales 0.6 percent lower last month.

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