By Garfield Reynolds
Sept. 24 (Bloomberg) -- Treasury Secretary Hank Paulson's $700 billion proposal to bail out the U.S. financial system may send the dollar to record lows by swelling the budget deficit.
Paulson's proposal to buy devalued securities from banks would drive government debt above 70 percent of gross domestic product, the most since 1954. The annual deficit may balloon to as much as $1 trillion, a level that TD Securities Ltd. says could drive the greenback to $1.95 per euro. The currency reached an all-time low against the euro of $1.6038 on July 15.
The CHART OF THE DAY compares the federal budget surplus or deficit with the dollar's value against the U.S.'s main trading partners. The currency's trade-weighted index dropped 28 percent since the end of 2000, as the budget turned from a $237 billion surplus to deficits that reached a record $413 billion in 2004.
The dollar is vulnerable to deficits because the U.S. lacks savings to fund investment, leading the government to rely on sales of bonds to investors abroad, TD Securities said in a report from London.
``This is potentially a massive shock to the U.S. currency, because of the immense increase in the supply of Treasuries that will take place,'' Joshua Williamson, an economist at TD Securities in Sydney, said in a phone interview.
To contact the reporters on this story: Garfield Reynolds in Sydney at greynolds1@bloomberg.net
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