US Sub-Prime Fallout Set To Linger

Source: The Business Times, November 3, 2007

Jitters may further lower US interest rates, dollar value

(TOKYO) FINANCIAL and economic fallout from the sub-prime mortgage crisis in the US will continue for a long time and will lead to further significant falls in US interest rates and in the value of the dollar, a senior global investment manager predicted in Tokyo yesterday.

He spoke at an Asian bond market conference as Tokyo stock prices slumped by more than 2 per cent following the plunge on Wall Street on Thursday.

‘After the Asian financial crisis (of 1997), it took two years for financial markets to re-establish their equilibrium, but it will take longer in the US market because housing assets are involved,’ said Douglas Hodge, Asia Pacific area managing director for global bond management company Pimco.

US interest rates are likely to go down by a further 0.5 to 0.75 percentage points over the next 12 months as the crisis continues to unfold, while the dollar will decline by a further 10-15 per cent against other major currencies, Mr Hodge told the conference, which was co-sponsored by the Asian Development Bank and by the Japanese and Thai finance ministries.

The meeting took place as the Nikkei 225 stock average declined by 352.92 points or 2.1 per cent to 16,517.48.

Bank of Japan governor Toshihiko Fukui alerted parliament to dangers, saying: ‘There could be unexpectedly large swings in financial markets. That risk has not materialised yet, but we think it is fairly big.’

Mr Hodge suggested that Asian financial markets were becoming increasingly attractive to global investors even as growing turmoil envelopes those elsewhere.

‘Macro-economic fundamentals will continue to push Asian currencies higher,’ he suggested. Economic growth in Asia and elsewhere should compensate for falls in the US, he said, adding that, ‘we are bullish on Asia’.

Thai finance minister Chalongphob Sussangkarn told the Tokyo conference that huge external capital flows into Asia were a mark of global confidence but at the same time they were complicating the task of managing exchange rates in the region.

Other experts also warned that the growth of huge official foreign exchange reserves could create financial and currency instability.