DOLLAR HITS ROCK BOTTOM

The US dollar, which has been falling against the major currencies for several years now, has really gone into a tailspin after the US interest rate cuts in September and October 2007:  The Dollar trades for the Euro at a rate of almost $1.5 to EUR 1, very near a level of psychological importance.  According to the majority of forecasts, it will keep falling.  Some people even predict that the exchange rate might fall as low as $1.7 to EUR 1 in 2008.

It is already obvious today that the key cause of the plummeting dollar is the "critical" situation in the US mortgage market.  Banks which operated in that market used a new model of mortgage loans:  they decided to stop lending money directly to borrowers and preferred to borrow money in the market, lend it to customers, "package" their own debt as "collateralized debt obligations" and sell them.  But when US real estate prices began to fall, mediator banks started to lose money.  According to some estimates, total losses on Wall Street and in the City of London have already exceeded $50 billion.  Citigroup has already announced that it would write off $11 billion in bad loans, Merrill Lynch - $8 billion, Morgan Stanley - $3.7 billion, and Bear Stearns - $3.2 billion.  The British bank, Barclays, wrote off $2.7 billion, and the British-Swiss HSBC - $3.4 billion.  Banks in continental Europe are also losing money:  UBS had to write off $3.4 billion, Deutsche Bank - $3.2 billion, and Credit Suisse - $1 billion.  Cuts in the dollar reserves held by the central banks of various countries was yet another factor which pushed the US currency down.  Incidentally, this trend is growing, and the central banks of many Asian countries might also start diversifying their currency reserves.

The crisis in the US financial sector grew so large that it began to affect other sectors of the US economy too.  The Dow Jones Industrial Average is already 10% leaner compared to last month, and many experts think that it will keep falling.  Analysts believe that the financial crisis will continue, largely because of the high degree of interdependence between the credit market and the real sector of the economy.  A serious slow down in economic growth is expected in the United States as early as in November-December 2007.  The GDP growth rate should slow down from 3.1% in the third quarter of 2007 to 1.5% in the fourth quarter.  Analysts predict a growth rate of 1-1.5% in 2008.  If the US trade and credit balance cannot be corrected, a slump will become more likely.  Only the reacceleration of economic growth in the United States in 2009-2010 will bring the dollar back to its feet.  The forecast for late 2010 is $1.4 for EUR 1.

The slowing of the US economy will have global effects.  Due to the high degree of integration of the financial markets, the crisis will spread to Europe and especially to Britain, whose banking system is the most dependent on the US market.  Those Asian countries which are major exporters to the United States will also grow more slowly than in 2004-2007.

In the conditions of global interdependence of the markets, the failing dollar and rising euro will affect the development, not only of the banking sector, but also of industrial companies in EU countries.  "A very strong euro is a major reason for concern in some of the export-oriented sectors," European Commission President Jose Manuel Barroso told Reuters recently.  At present, a substantial portion of budget revenues in the EU countries comes from export operations.  A rising euro makes European-made goods less competitive in terms of price.  In the opinion of experts, the tourism and car manufacturing sectors will be first affected.  A number of European giants, including Airbus, Siltronic, Daimler AG, BASF and Lufthansa - have expressed their concern about the situation.  Airbus General Director Thomas Enders is cited by the Russian newspaper Kommersant as saying that the "dollar has crossed the pain threshold, and this is already a major threat."  In his opinion, the company cannot afford to follow its schedule of investment in research and design any longer, so expenditure on projects in these areas will be cut.  "We should review our business model.  It is already obsolete," he said.  Already in the third quarter, Airbus losses might reach Eur 776 million.  According to analysts of the world's largest chemical company, BASF, the strengthening of the euro compared to the dollar by 1 cent affects the company's annual sales by Eur 250 million.

The new dollar exchange rate and the trend toward its further decline, confront the Azerbaijan economy with serious new problems.  On the one hand, the fall of the dollar results in rising oil prices, which is in the interests of the economy of our country.  On the other hand, Azerbaijan now spends more than before, when the dollar was more expensive, on importing goods and services and attracting investments, which are calculated in dollars.  And this, in turn, might set off yet another inflationary wave and a worsening of the social and economic situation of the population.  Speeding up the structural and institutional reform of the national economy, developing export-oriented sectors and creating a favourable investment environment are solutions to the situation that has arisen.