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The dollar is getting trounced today on word from China that the nation is favoring "stronger currencies over weaker ones". This opens the door for China to dump U.S. dollars into the open market, further eroding the dollar's value.
So why does this matter to American homeowners?
Mortgage rates are based on the price of mortgage bonds. And mortgage bonds are priced in U.S. dollars. So, as the dollar gets weak, the value of mortgage bonds gets weak, too. Lower values lead to lower demand which, in turn, leads to lower prices.
As the prices for bonds drop, the bond yields increase and mortgage rates go up.
Check out these U.S. dollar statistics from Bloomberg today:
Ask yourself: Would you want to be holding an asset that is worth less over time? Right. Neither does China, and neither would a whole lot of other countries.
More dollar dumping should push mortgage rates higher going forward.
Source Dollar Slumps to Record on China's Plans to Diversify Reserves Agnes Lovasz and Stanley White Bloomberg.com, November 7, 2007 07:17 EST http://www.bloomberg.com/apps/news?pid=20601087&sid=abxV_7HapdYk&refer=home
Dan Green (NMLS #227607) is an active loan officer with Waterstone Mortgage. Email Dan ator call 513-443-2020.
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