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Mortgage meltdown, shrinking dollar

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Scott Jagow: It’s not just stocks taking a beating. The dollar hit a record low against the euro today: $1.37 gets you one euro. Analysts are predicting things will only get worse for the dollar. Joining us from London, our European correspondent Stephen Beard. Stephen, what’s causing this latest drop for the U.S. currency?

Stephen Beard: The trigger was undoubtedly Standard & Poor’s announcement that it may downgrade $12 billion worth of subprime mortgage debt. I mean the signal this sends to the market is that there could be a credit crunch in the U.S.

Jagow: But what does that have to do with the dollar?

Beard: Well it kind of reinforces the perception that the Fed might have to lower U.S. interest rates to spur growth and that at a time when interest rates in Europe are rising.

Jagow: And higher interest rates help a currency right?

Beard: Absolutely. I mean if international investors feel that one currency, let’s say the euro, is in time going to be yielding a higher rate of return than the dollar, that’s where they’ll want to put their money. Now at the moment, the euro is paying only 4 percent compared with 5.25 percent in the U.S., but the expectation is that perhaps because of a credit crunch in the U.S., because of economic weakness in the U.S., that Eurozone interest rates will rise much higher than American interest rates and therefore the euro will be more attractive as an investment.

Jagow: Mmhm. Stephen, any signs we’re seeing of how this is affecting trade between Europe and the U.S. or tourism between the two?

Beard: Not as yet but these things do take time to sink in. But clearly we’re now heading into the territory where the euro will buy $1.40. It seems inevitable that this is going to deter quite a few I would have thought of the three million or so American visitors that cross the Atlantic every year to vacation in Europe.

Jagow: All right Stephen Beard in London, thanks.

Beard: OK Scott.

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