Dollar fall and mortgage forecast darkens US outlook

The falling value of the dollar and new forecasts for mortgage-related strife have left the US economy reeling and credit tighter than ever.

US Treasury secretary Henry Paulson has issued a very gloomy mortgage outlook, claiming that defaults – at the centre of this summer's sub-prime and ensuing credit crisis – are likely to be even higher next year.

A rise in defaults on home loans is likely to further affect the value of mortgage bonds that they back, leaving bond depreciation-suffering banks too cash-strapped to offer new loans for housing, serving to slowdown the property market further.

Meanwhile the dollar has reacted to growing concerns over US economic weakness by slipping ever lower, allowing the euro to reach a new high of $1.4873 in Asian markets. – showing that the rate cuts intended to ease credit after default problems have taken their toll on the greenback.

MarketWatch reported the comments of Andy Cates, senior international economist at UBS, who in a market briefing responded to Mr Paulson's mortgage predictions.

"The bad news on housing keeps moving from awful to even more awful," he said, adding to the climate of pessimism that was entrenched this week by news of another prominent US mortgage lender, Freddie Mac, seeing growth hit by bad debt.