Will the American housing slump affect international trade and foreign exchange rates?
Tuesday, July 10, 2007
The sub-prime mortgage crisis was once again evident today in the sharp drop in stock prices, yet today was one of the most caustic and dramatic changes in almost a month and many cannot help but wonder why. Ironically, it is not hard to see why an understanding of future expectations plays such an enormous role in the economy right now. Losses continued to accrue despite of Ben Bernanke’s speech to the National Bureau of Economic Research in Cambridge this afternoon. He said nothing in terms of monetary policy and the direction of the interest rate and, in this case, no news is not good news. The housing slump is without a doubt not going away anytime in the near future to alter its effects on the stock indexes and without a light at the end of the tunnel, the damages could be longer lasting. Yet today saw another record broken, and that is the dollar’s all time low position in comparison to the euro (peaking at 1.3742) and the 26 year low in comparison to the yen according to Reuters and EBS. This domestic issue is spreading to international affairs and the bottom of the pit has not yet been hit. With increased interest rates, come plummeting stock market prices and a turn away from risky investments. This, in turn, could hurt markets around the world. Will the housing market affect trade and exchange rates? The answer is yes but the extent and duration of it has oracles on both sides and the debate is not yet over.
( By Francesco Lugli Princeton Economics Major and CIIM Intern)