U.S. Dollar Mixed After Treasury's Announcement

As the forex markets opened at 6:00pm ET on Sunday evening, the U.S. dollar had a mixed reaction against the other major currencies.  Forex markets reacted to Treasury Secretary Henry Paulson's announcement that the U.S. government has seized control of the two mortgage giants, Fannie Mae (FNM) and Freddie Mac (FRE), as a surge of mortgage defaults in the past year has threatened the survival of the Government Sponsored Enterprises (GSEs). 

The U.S. Treasury's announcement of its plan to take over the mortgage giants will likely cause currency markets to be volatile in the short term.  Although the consequences of the Treasury's plan will most likely be negative for FNM and FRE equity investors, the plan should be supportive of the U.S. financial sector and signals a possible for turnaround for the mortgage crisis. 

The U.S. dollar surged against the Japanese Yen, as it opened at 108.98, compared to its close of 107.73 on Friday evening; however, the dollar opened lower on the other six major currency pairs.  After the foreign currency exchange markets opened, the dollar recovered against the seven major currency pairs, excluding the Japanese Yen which strengthened against the dollar.  Over the past two months the U.S. dollar has rallied against the other major currencies as measured by the U.S. dollar index (.DXY), which has gained seven over the past eight weeks. 

The yen fell against the dollar, as investors believed that risk appetites for carry trades will increase due to a more stable U.S. financial sector. A carry trade is when an investor sells a currency with a relatively low interest rate, and uses the funds to purchase a currency which yields a higher interest rate. A lack of stability in financial markets causes large uncertainties in carry trades, and increases the amount of risk involved. The government takeover of the U.S. mortgage companies will add stability to the financial sector and could be the catalyst financial markets have been anticipating.

Comments

[stonebraker:]

I still find it difficult to understand how the dollar would benefit from a situation in which a country leveraged to its gills adds an additional 50% of liabilities to its books. At some point the ability to ever repay debt has to become a consideration here.

2008 Sep 08 08:09 AM

[OldLimey:]

I agree with stonebraker. If the US were a business it would be headed for Ch 11. If it didn't print what is still the world's primary reserve currency it would be headed for the Paris Club. The only way out is to inflate the debt away - assuming foreign holders are prepared to sit idly by.

2008 Sep 08 01:39 PM

[Ebi:]

A move from 107.73 to 108.98 is hardly a surge.

2008 Sep 09 11:23 PM