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Is It The Euro Not The Dollar That Is Causing Global Problems?

It is an undisputed fact that the dollar is weak. The trade deficit run up by the Bush administration in financing the war in Iraq and the sub-prime mortgage crisis are just two of the factors that have driven investors from the dollar to its baby sister, the Euro. The resulting effect has been to see a rise in the price of oil above 100 dollars a barrel as the race for commodities in the markets has left currecy traders trampled under the rush to get out of the way. Oil, gold, even wheat seems preferable.

The US economy is brinking on recession, although we have yet to see one quarter of negative growth ( the definition of recession is two quarters of negative growth). Definitions aside, you can feel the mood of anticipation when you talk to realtors in some parts of the country. In South Carolina, a real estate market that has not been hit by as large a correction, as say, California, realtors in Mount Pleasant tell an all too familiar story when they say that they are finding buyers sitting on the fence in a waiting game to see how prices will jump before committing to a purchase.

The mortgage crisis which burst the bubble in the US was quick to spread and the tightening of secondary lending soon put UK mortgage lender Northern Rock Bank in a liquidity crisis that needed a government bailout. In a matter of a month the virus had crossed the atlantic and the UK property market caught the same cold as its never ending climb stalled under a realization that prices were not a never ending staircase. This was something that had not been seen for nearly a generation of home-owners and was 1989 since the fears of mortgage debt being higher than property value had reared their ugly head.

The virus continued to spread. Spanish developers who had been building as fast as they could were soon realising that they had more units than they could sell and the holiday property industry in the Spanish Costas fell victim to the same indecision found in the UK. (Unsurprising really as up to 65% of Spanish property on the coastline of Spain was bought by UK residents looking to invest in a place in sun.

So whilst the world coughs and splutters towards global recession could it be that the Euro could hold the key to releasing the pressure and will we have to wait until the recession bites into European economies before the European Central Bank cuts interests rates?
It is certainly no forgone conclusion that a cut in base rates in Europe would take the pressure off the dollar. Certainly the election result in November could see McCain having to fund an even longer exit strategy in Iraq that would push the deficit to epic proportions. Hopefully voters who may have to suffer $4 a gallon at the petrol pumps this summer will alight them to the fact that a democrat may be a better choice for them than more of the same.

A democrat win in November and a cut in European interest rates however may produce a combined effect that would ease pressure on the dollar. The good will feeling normally felt following any election would stimulate the economy in the states and combined with falling oil and gas prices it may be all the economy needs to stave off the recession everyone is feeling.
Lets hope!

Article Source: http://www.dummiesguideto.com

Neil Ebsworth is co-founder of AMLASpain and Mount Pleasant SC Real Estate. Find similar articles at OMDN

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