Dollar Weakens Due to Disagreements Over U.S. Government Plan

The dollar exchange rate fell this morning on foreign exchange markets against the Japanese currency by more than 1 percent as negotiations over the U.S. government’s bank bailout plan faced new obstacles, and the collapse of Washington Mutual also negatively impacted the U.S. currency.

The price of the dollar fell this morning by 1.1 percent to 105.20 yen, while the Japanese currency strengthened against the euro as it is considered a safe haven in uncertain times. Thus, the euro exchange rate against the Japanese currency fell by 1.3 percent to 153.5 yen, and it also fell against the dollar by approximately 0.25 percent to 1.4585 dollars. The sudden changes in exchange rates are a result of new disagreements regarding the U.S. government’s proposal for a $700 billion financial system bailout. After Democrats and Republicans reached a preliminary agreement on the bill proposal on Thursday afternoon, a new plan emerged that evening, proposed by a group of Republican representatives in Congress, which is significantly different from the government’s. Therefore, it is unclear how the situation will develop further, and negotiations are scheduled to continue today.

“There is nervousness in the markets because of this. It is believed that some agreement will be reached in Congress, but investors fear that due to numerous compromises, the final law will be less satisfactory than the one proposed by Treasury Secretary Henry Paulson,” says Rob Minikin, currency strategist at Standard Chartered. The pressure on the dollar is also a result of the collapse of the American regional bank Washington Mutual, which represents the largest bank failure in U.S. history. The third-largest American bank, JPMorgan, will acquire WaMu’s deposits, whose shares have fallen to low levels due to massive losses on bad mortgage loans. To improve liquidity and calm the situation in the financial markets, where interest rates rose sharply this morning, central banks from numerous countries, from Japan and Australia to Britain and Switzerland, injected tens of billions of dollars into the money markets. The European Central Bank also joined them, offering an additional $30 billion in overnight lending. (H)