Plunging Dollar Will Set World Markets Reeling (Heather Stewart)

  Heather Stewart -- Observer

  Dec 3, 2006 -- The slowdown in the U.S. economy, which has sent the dollar into freefall over the past fortnight, will have devastating knock-on effects in markets around the world, analysts warn.

  Wall Street is now betting that Federal Reserve chairman Ben Bernanke will slash interest rates to stave off a recession. The dollar ended the week at $1.98 against the pound, and $1.32 to the euro, but analysts say there is further weakness to come. 'I think the dollar's going to hell in a handbag,' said David Bloom, currency strategist at HSBC. 'The market is starting to think that the US is going from a soft landing to a hard landing.'

  Some analysts have argued that a more balanced global economy, with strong growth in Asia and Europe, means the impact of a US slowdown will be limited; but Stephen Roach, chief economist at Morgan Stanley, believes China -- and in turn the rest of Asia -- will follow.

  "America is China's largest export market, accounting for 21 per cent of its total exports over the past five years," he said, adding that economies such as Japan, Korea and Taiwan, which export directly to the US but also sell components to China that are assembled before being sent on to the US, will be hit.

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