Short Squeeze Brings Down the Dollar

It’s only the first trading day of the week, but still we are already flooded with major news one after another nonstop. The US financial system is now being restructured rather drastically, with proposals now underway to convert US investment banks Morgan Stanley (MS) and Goldman Sachs (GS) into traditional depositary banks, and also for US Treasury’s Paulson to have unprecedented power when it comes to holding the nation’s purse strings.

The US dollar lost more ground Monday in forex trading, falling to a 3-week low against the Euro, and a 4-week low against the Swiss franc and the British pound. With sentiment churning up against the dollar last Friday in favor once again of carry trades, coinciding with major countries’ ban on covered short selling, are we going to see a sharp reversal of the dollar uptrend now? According to the latest Commitment of Traders report, large speculators like hedge funds continued to pile on Euro shorts ( which increased to 40,654 from 36,432 conracts in the prior week) in the currency futures market on the IMM, so if stops are tripped on the downside as the dollar falls, expect a decline with quick momentum. EUR/USD’s nearest resistance is around 1.4710, then 1.4770. USD/CHF’s next downside targets are 1.0780-1.0800, 1.0740-50.

US stocks aren’t rejoicing; and at one point Monday, the Dow fell over 200 points in stock trading. What’s wrong? Has euphoria disappeared as quickly as it came? As Paulson and Bernanke come up with more Band-aids, people are asking more and more questions (except the politicians and their buddies).

How much will the government pay for those toxic junk assets that nobody wants? What will they buy? And when will they buy? Not to mention that the US$700 billion bailout cost would stretch to almost US$2 trillion when you add up all the handouts that are to be disbursed to the different financial institutions and agencies. Where is all this money going to come from? The scary thing is, with so much money flowing around unscrutinized through nooks and crannies, they are bound to benefit individuals too.

Comments

[MarvinMBA:]

I say let the toxic junk assets fail. Trying to buy they up will be absolutely destructive to the dollar and impossible for the taxpayer to cope with. Inflation will go up and not stop if this deal goes thru. It will force a dicipline in the system if the creditors get what they deserve...buying bad paper and pay the price just like investors in our stockmarket now. Do these junk bond holders deserve more consideration than our own people??? Marvin the Maven

2008 Sep 22 01:32 PM

[MarvinMBA:]

Times are so tough now for the average guy letting the paper die and starting over again would be the best thing. We cannot handle any more debt because were going into a Depression and need every resource we can get. Giving money away will cause massive inflation and much much more problems for the country than we now have...Marvin the Maven

2008 Sep 22 01:35 PM

[MarvinMBA:]

Let the junk bond holders rework the real estate and assets they acquired like everyone else that holds secure paper. Why bail them out? This is a raid of our very lives and existance and Congress is destroying the US if this giveaway deal to the rich holders of this paper proceeds.

2008 Sep 22 01:38 PM

[NOWHEREMAN:]

Junk should be treated as junk. Put it on the Books for all of the world to see and treat them just like corporations have done in the past, non cash related loses. They can then hold onto them indefinitely as future Tax credits or shove themselves into Chapter 11 until the issues are resolved. They got into trouble by themselves, they were/still are getting paid the Big Bucks. Let the weak die and the strong survive.

2008 Sep 23 10:50 AM