Dollar Falls as Stock Rally Tempts the Carry Trade

Bailout Nation, that’s what comes to my mind when I hear about the Fed and US government coming up with their latest and broadest plan to erase all the toxic mortgage-related assets from banks and other financial institutions (Paulson said Friday that he will ask Congress to take legislative action next week). They have figured it won’t be enough to bail out individual companies one after another since so many companies are in deep trouble, drowning in debts and losses due to the absence of liquidity in the credit markets. Of course, stocks all around the world have shot up in a one-way street in response to this and also other plans announced by global central banks.

US President Bush authorized the US Treasury to tap up to $50 billion from a Depression-era fund to insure the holdings of eligible money market mutual funds, plus SEC’s Cox announced on Friday a ban on normal short selling (not just naked short selling anymore!) on 799 financial stocks in the US till October 2, imitating UK FSA’s footsteps. In the UK, short selling of banks, insurers and other financial companies will be banned starting next Tuesday and will last till the end of 2008.

The US dollar initially rose but later fell sharply against other currencies like the Euro, Swiss franc, British pound and other high-yielding currencies (except the Japanese yen) in forex trading, as risk appetite returns with a vengeance. In the past few days, US dollar was in such high demand as institutions stocked up on safe US Treasury bonds, but now the situation has reversed. With stocks soaring high and higher, the Japanese yen has become a victim. Carry trade interest has returned and may stay for the time being as long as stocks are having their forced rally.

Comments

[Smarty_Pants]

1) Cost of bailout to the taxpayers will be measured in the Trillions.

2) Companies will be forced to take part of the level 3 losses currently being ignored as the FED will be buying at a steep discount to original value. Many survivors will be lucky to emerge from the transaction with a net shareholder book value of ZERO.

3) The dollar is doomed. FED must put the printing presses into overdrive to create enough money to save everyone's bacon.

Buy gold now, while your money is still worth something.

If you think rising prices have been bad so far, you ain't seen nothing yet.

[buyitcheap]

Smarty - you are spot on - we should go short... oh, wait , we can't. :-(

[Here's a thought]

Anyone betting against the US needs a serious head check.

[FxHedger]

Hey Here's a thought,
Have a look at the US Public Debt, Trade Deficit, Current Account Deficit, Budget Deficit...
I'll be the first to say that the US is home to some of the smartest folks in the world, but that won't save the dollar. This has been coming a long time.
The dollar hasn't a prayer.

[iThinkBig]

The Black Swan event is now an high level of probability with a painful economic crash around 2011. But like shocking a dark black pool when you open it for the summer, America's waters shall turn blue once again. Take care of your neighbors and community. Act like leadership. There will be rewards for this sacrifice later. That does not mean investing foolishly because Hank Paulson asks you to, it means feed and shelter people so the citizenship can regroup at a point. The real economic tsunami's from all of this will take time to reach shores, there is time for battle plans.

[SWRichmond]

"Dollar Falls as Stock Rally Tempts the Carry Trade"

Is there a school you can go to to learn spin?

The dollar fell as markets began to realize that the printing has just begun in earnest.

[curbs-in]

I'm amazed at our government's plan to assume toxic debt from any bank or financial institution that cries wolf! The government's plan is nothing more or less than a "shell game" that has shifted massive corporate debt to the backs of taxpayers. For some reason the Fed and Treasury is of the opinion that by shifting the debt they can make it go away. Perhaps they should ask NASA to launch or debt into deep space and POOF it will be gone!

Bail-out like this have long term and unintended consequences, much the same as the introduction of new species of reptile into a different ecosystem: In a year when you don't have any birds left, don't come crying to me. Our economy, due to inflated real estate prices, is in a period of readjustment and contraction. When you pass out $$$trillions in bad loans, there is a natural consequence for this behavior. Until, of course the Fed and Treasury step in to "save" the day and tell us that they are doing it as a favor to all of us. Our weakened dollar is only the start...

Perhaps the Fed and Treasury can get Congress to pass a law this weekend that makes it illegal for the markets to go down over the next 90 days. Now there's a free market idea if I've ever heard of one!

What has been introduced into our economy is so crazy that nobody can really figure it out. Perhaps this was done so Bush would not go to the inauguration this January with his hat in lap being remembered for "prosperity is just around the corner" -- or was that our nation's economy is "fundamentally sound"?

[taojaxx]

Perhaps there's no point in trying to refinance my mortgage now: a 6% 30 year fixed liability is about to turn into a gold mine in an 18% inflation world. ;)

[buyitcheap]

Has anyone noted that they ruled short selling illegal and the financials STILL had distribution? Sounds more like they were backstopping and grasping for air.

Taojaxx - you're exactly right and that is how they will FIX the situation. Hang tight and go long commodities, short the long end of the yield curve and ride it. In a few years, if not sooner, we'll be clipping 15-18% treasury coupons.... sad really...

[buyitcheap]

and by the way, see if you can find out who owns your mortgage and offer to buy it back for 20 cents on the $. ;-)

[paultaut]

World CDS market: $62 TRILLION.

Lets say only 20% located in US; assume a markdown of 80%. Hmmm, on this alone, we are talking in terms of $2.4 Trillion. Personally, I think more than 20% lies within but, whattahey.

3 Month LIBOR rose all week including Friday. Some things called Option ARMS are due to be reset next year. LIBOR plus, hmmm.

Hard assets, and equities based on Hard asset currency countries. Currencies which will retain value.

Bye, Bye Miss American Pie, drove my chevy to the levy but the levy was dry....

Want to save the Economy? Have the FASB rescind the Mark to Market rules.

[wpdragon]

Yes, and call your congressmen and women and DEMAND that they convince Cox not to allow ANY type of selling of stocks... that's right, no naked shorting, no legal shorting, and no outright selling of any kind.

We have a constitutional right to make money in these markets, and it must be protected at all costs!!!!

And for cripes sake, get bigger trophies for the kids who lose the sports they play, it will prepare them for their business careers!

Panama, folks, Panama, they've got a swell ex-pat community.

[Elaine Supkis]

Culture of Life News here!

Japan's yen is NOT a victim of any sort! How silly is this talk?

Japan's Nikkei celebrates the weak yen! The Bank of Japan demands and creates a weak yen by keeping interest rates far below the real rate of inflation in Japan! Japan even said, last year, the ideal value of the yen would be 120 to the dollar. So far, all their efforts have been towards making the yen cheap!

This is why the yen, alone, didn't rise against the dollar. It fell. To the TREMENDOUS delight of the Japanese exporters!

Commentary like the one by Ms. Cheng is not very sophisticated. Where does Seeking Alpha find these people?

[elwind45]

Why not fold FAN/FRED into AIG? The cash flow from AIG will cover the property. Sell the countries gold for 180B and request the banks to sell AIG equity to FED. While the AIG equity grows the FED can score the equity in trust for the banks. Holding the debt until maturity and shifting the income to the property instantly stablizes R.E. Banks can hold the deeds and the fed can charge usury against the AIG equity in trust. This type of scheme should hold the line. The FEDZ own most of NEVADA and can start digging to replace gold. I would start buying up mining equipment to rent out to small miners for royalties. The finding of gold is easier now than ever. Its the cost of getting out of the ground is costly part. The FEDZ wiped out the equity in fan/fred and left AIG intact. This would be one helluva shotgun wedding! AIG holds equity positions in about every company on the planet. A cash flow machine in 130 countries. Can be used to stablize the dollar. Soak up extra dollars by raising premiums.