posted by 4x-news on Sep 25

Congress remains deadlocked over the proposed $700 Billion plan to bail-out the American mortgage industry and alleviate the financial crisis, but that hasn’t stopped forex traders from weighing the implications. Suffice it to say that the Dollar fell 2.5% against the Euro-its worst-ever single session performance- in the first day of trading since a loose outline of the proposal was made available to the public. The consensus, thus, is that the plan is unambiguously bad for the Dollar. Investors expect the US national debt will balloon, and it isn’t clear whether foreign institutions and Central Banks are willing to play along, as they have in the past. In fact, treasury bond prices mirrored the performance of the Dollar, recording the sharpest fall in nearly two decades. Ironically, the potentiality that is more disconcerting for Dollar bulls is that the proposal won’t be passed at all, and the global financial system will collapse as a result. Damned if you do, damned if you don’t. Marketwatch reports:

“Investors [will] favor currencies where the central banks retain an anti-inflationary stance and where there is a well-developed government bond market where they can leave their capital. The euro would seem the most likely home for such investment flows.”

posted by 4x-news on Sep 21

The Treasury Department has officially dipped into the Exchange Stabilization Fund (ESF), the obscure and rarely utilized pool of foreign exchange whose ostensible purpose is to stabilize forex markets in times of uncertainty. The Treasury surely skirted this mandate by using a portion of the reserves to provide insurance to money market funds, which are facing a sudden collapse of confidence in the latest chapter of the credit crisis. Although, the move was not without precedent, since the ESF was used as a source of capital for a loan to Mexico as recently as 1995. Ironically, the Treasury’s actions this time around will surely provide a boost to capital markets, thereby reinforcing the notion that the US remains the safest place to invest in crisis situations, which in turn, supports the Dollar. The Wall Street Journal reports:

The Fund, which now amounts to $50 billion, was created in 1934 to conduct interventions in foreign exchange markets. The enabling statute gives the president and Treasury secretary enormous latitude to act without prior consent of Congress.

posted by 4x-news on Sep 6

A (deliberately) leaked report has revealed what investors and analysts have suspected all along: the “Committee to Save the Dollar” is real. Evidently, back in March, when the credit crisis was threatening to spiral out of control, the world’s leading bankers were busying themselves preparing a plan to prop up the ailing the Dollar. Their rationale is/was that a more valuable Dollar would do more to relieve inflation (via lower food and commodity prices) and ultimately be easier to implement than a worldwide hike in interest rates. Under the plan, the Central Banks of Europe and Japan would join the Federal Reserve Board to coordinate the large-scale sale of Yen and Euro assets, in exchange for Dollars. While the Dollar’s impressive rally has thus far eliminated the need for intervention, the long-term prognosis remains questionable. Regardless of economic fundamentals, however, currency traders may be reluctant to bet too heavily against the Dollar, lest the Central banks move forward with their plan. Bloomberg News reports:

None of this means the dollar won’t plunge anew if the global credit crunch worsens. For the moment, though, the need for some kind of Plaza Accord-like currency deal has been reduced icesave.

posted by 4x-news on Sep 5

Everyone has a theory to explain the Dollar’s explosive rally, which has yet to run out of steam. A recent one identifies a shift in China’s forex reserve policy as a driving force. Apparently, in an ostensible effort to clamp down on inflation, the Central Bank of China is resorting to draconian measures. One rule change, which was executed with both speed and lack of media coverage, requires commercial banks to hold a larger portion of their reserves in Dollars, rather than Chinese Yuan. In addition, such banks face new restrictions on foreign debt, which is designed to turn them into net buyers of Dollars. Analysts suggest that this policy represents a roundabout attempt to slow the appreciation of the Chinese Yuan. If they are correct, than surely the Central Bank of China has succeeded, for the currency has virtually ceased in its interminable upward march against the Dollar. This upshot suggests that the goal of the Central Bank was not to fight inflation, but rather to avoid a post-Olympic economic slowdown. The Telegraph reports:

They are now more worried about growth than overheating, and you are seeing that play out in the currency markets. There has been a remarkable change of view.”

posted by 4x-news on Sep 2

John Taylor is head of the world’s largest currency hedge fund, International Foreign Exchange Concepts. Accordingly, when he speaks about currencies, people tend to listen. In an extended interview with Bloomberg News, Taylor noted that volatility has surged in the forex markets. On average, the Dollar is fluctuating 46% more against so-called major currencies and 23% more than emerging currencies, compared to 2007. However, this volatility is largely random- perhaps as a result of increased liquidity- which means inefficiencies in the markets are becoming harder to exploit and profit from. One of the fund’s largest bets is against the US Dollar, specifically against the Euro. Taylor’s rationale for this bet is nuanced, and is more fundamental than technical, which is surprising given his fund’s primary trading strategy. Bloomberg News reports:

The prediction is partly based on his charts of the U.S. real estate cycle, which he says has a major impact on the dollar and will continue to point south for the next couple of years, dragging down the currency with it. He also says the price of a barrel of crude oil might reach $250 in 2011, further eroding the strength of the U.S. economy and the dollar.