US woes grow as Sudan warns banks to stay away from weakening dollar

Published on Saturday 29 December 2007 12:18

THE US dollar's losing streak looks likely to continue into 2008 as the odds shorten on an American recession and international events reduce the greenback's lure still further.

Sudan's central bank is expected to humiliate the once mighty dollar on Tuesday by insisting that it will deal only in the euro and local currency, and will advise local commercial banks to follow its example. Bank governor Sabir Mohamed al–Hassan is concerned that the benefits of Sudan's recent economic boom will be wasted if the currency is tied to the weak US dollar.

The move follows a sell-off of US currency by Japanese traders on Friday following the assassination of Pakistan's opposition leader Benazir Bhutto. The killing is expected to bring further instability to a key US ally and force oil prices higher.

Economists expect domestic woes to contribute further to the dollar's decline, with opinions now evenly split on whether America will endure a recession this year.

Richard Berner, an economist at Morgan Stanley, said the credit crunch would take its toll on the wider economy in 2008: "A mild recession is now likely, with no growth for the year ahead."

His comments follow former Federal Reserve chief Alan Greenspan's recent observation that the chances of a US recession have moved up to 50%.

New York Times economist Floyd Norris said there was a danger that credit problems would be exposed in parts of the economy beyond the sub-prime housing sector which was the root of this year's problems..

He said: "It was the greatest credit party in history, made possible by a new financial architecture that moved much of the activities out of regulated institutions and into financial instruments that emphasised leverage over safety. The next year may be the one when we learn whether the sub-prime crisis was a relatively isolated problem in that system, or just the first indication of a systemic crisis."

Sales of new single-family US homes fell much more than expected in November, and marked their slowest annual pace in more than 12 years, raising concerns that nervous consumers might tamp down their spending. Joseph Brusuelas, chief US economist at IDEAglobal, described the sales figures as "horrible".

In one rare bright spot, the US purchasing managers' index, a closely-watched measure of economic performance, rose to 56.6 from 52.9 in November. Economists, on average, had been expecting 52.0.

Sudan's central bank is advising commercial banks in the country to conduct their dealings with customers and foreign partners in currencies other than the greenback, with a view to "lessen the risk of continuing to deal in the US dollar."

The banks should advise their account holders to commute their US dollar assets to other currencies and "enlighten them on the risks associated with maintaining balances in the American dollar," it said, without elaborating on what those risks could be. The advisory note said the commercial banks may continue to accept the US dollar but would therefore "bear the risks resulting from those dealings."