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While the year-long surge in the Dollar has been a welcome development for American consumers and the US government (in terms of cheaper imports and easy credit, respectively), American businesses are not smiling. The strong Dollar has resulted in decreased competitiveness in the eyes of foreign consumers, and consequently, lower exports. For this reason, the US trade deficit has not shrunk significantly, despite a slight down-tick in imports. One must also look at the overseas earnings of American multinational corporations, which are frequently repatriated to the US and booked in Dollar-terms. In fact, as much as 50% of S&P 500 member company profits now come from overseas. Simply, lower exchange rates mean lower profits. In short, investing in the stocks of companies as a proxy for the markets in which they do business is not (as) profitable when the Dollar is strong.

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Posted on February 12, 2009
at 5:34 pm
Written / posted by: Simon
Filed under: Credit Crisis, Currency Trading, News, forex trading

As investorz gradually re-acquaint themselves with risk-taking, the interest rate story is once again dominating forex markets. For the last few weeks, this meant that investors were taking advantage of record-low US interest rates to fund carry trades in riskier currencies. Most recently, however, investors have begun to focus on the interest rate picture on the other side of the Atlantic. The Bank of UK just lowered rates to 1.5% and is “threatening” to match the Fed by dropping rates all the way to zero. The European Central Bank, meanwhile, is probably on the cusp of a similar interest rate cut. As commodity prices have relaxed and the credit crunch has slowed the expansion of the money supply, the ECB is firmly justified in cutting rates, under the pretext of fulfilling its mandate, which is to guard against inflation. The upshot is that interest rate differentials, which have been fueling the Dollar’s recent decline, may become less pronounced over the next year.

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Posted on January 8, 2009
at 9:17 pm
Written / posted by: Simon
Filed under: Credit Crisis, News

More than a week after America’s Federal Reserve Bank slashed its benchmark interest rate to the historic (low) level of .25%, investorz are still struggling to assess the implications. The immediate reaction obviously was positive, as Central Banks around the world (namely Hong Kong and Japan) quickly followed suit, and stocks rallied just as expected. In other words, investorz were lifted up by the belief that Central Banks can and will employ all available financial tools to maintain acceptable liquidity in financial markets and to prevent the economic downturn from turning into a depression (Also came up in my post about “Helicopter Ben“) On the other hand, forex traders were understandably dismayed by the growing gap between US and foreign interest rates, as well as the inflationary implications of the Fed’s plan to essentially print money and inject it directly into the economy. The Associated Press reports:

“While there was applause for the (Fed) cuts…investors are now standing back and reflecting further on what that means,” said…an analyst. “Some nervousness has been expressed in the currency markets. We have seen a weakened dollar, which has probably had an effect on the markets across the board.”

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Posted on December 26, 2008
at 11:58 am
Written / posted by: John
Filed under: Credit Crisis, Currency Trading, forex trading

Several years ago, Ben Bernanke earned the nickname “Helicopter Ben” by joking that the Fed would drop Dollars from helicopters if the American economic situation ever became desperate enough to warrant it.

The Fed under Ben Bernanke hasn’t sat on its hands as the financial crisis has unfolded. Bernanke, who took the Fed’s helm in February 2006, just as the crisis was beginning, has been the most activist Fed chief in history — all but guaranteeing that the Fed, like a good soldier, won’t stop firing until all its ammunition is spent.

Ben Bernanke honors his nickname by pledging to do everything in his power to stimulate the flow of money, short of literally dropping Dollars from the sky. Capital markets naturally reacted to this policy prescription with delight, as some of the surplus Dollars will certainly be used to bid up and stock and bond prices. Currency markets, on the other hand, were not so complacent, sending the Dollar back down from the depths from which it only recently emerged. In other words, zero-interest rates and a surfeit of dollars hot off the printing press has analysts and forex traderz wondering aloud about who will be foolish enough to want to own Dollars in the future.

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Posted on December 23, 2008
at 10:14 am
Written / posted by: Simon
Filed under: Credit Crisis, Currency Trading, News

 The dollar is sliding back into a rapid down spiral as the United States enters a new era of extremely-low interest rates and forex investors reassess the currency’s worth in a drawn-out recession.

A day after the Federal Reserve adopted a near zero-interest rate policy to stimulate the economy, the euro jumped as much as 4 cents against the dollar, the largest single-day move since the euro’s birth in 1999. Against the yen, the dollar tumbled to 87.14, the lowest level in 13 years. The dollar was also weaker against the pound and the Swiss franc.

The dollar — which on Wednesday rose as high as $1.44 against the euro from $1.39, before closing at $1.43 — had enjoyed a surprising rally since September, after Lehman Brothers’ collapse forced hedge funds and other big investors to liquidate assets and return money to the United States.

The Dollar continued to strengthen even after the government’s initial plan to shore up the financial system foundered, reaching as high as $1.2453 on Nov. 20. That counterintuitive shift seemed to highlight the dollar’s role as a safe haven store of value in times of crisis, despite the recession. Things are bruising and shifting towards exactly the opposite side right now.

But the dollar’s brief appeal in recent months mainly reflected a lack of better options. While much has been made recently of the euro as a new rival, the currency used by 15 European economies has weakened as recession struck the Continent. At the same time, Japan and other powerhouses in Asia quickly succumbed to a global deceleration.

And while some economists are predicting a mild recovery in the second half of 2009 as the Fed’s actions and a $700 billion stimulus plan promised by President-elect Barack Obama raises demand, unemployment could yet hit double-digits.

Taken together, the effect is one of greater downward pressure on the dollar — a dynamic that economists expect will continue for the foreseeable future. Currencies normally reflect the underlying fundamentals of an economy, and slow, controlled declines or gains allow businesses and investors to plan rationally for the future. But even by the standards of currency markets, the whipsaw nature of the dollar’s recent movements has come as a shock to many investors who expected the dollar to stabilize at a stronger level.

http://www.nytimes.com/2008/12/18/business/worldbusiness/18euro.html?ref=business

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Posted on December 18, 2008
at 9:59 am
Written / posted by: John
Filed under: Credit Crisis, Currency Trading, News