Profiting from Fear in Forex: Dollar Hits 16-Month High vs. Euro

Panic and risk avoidance continues to dominate the investing landscape on Friday, resulting in the zigzag rollercoaster ride in the markets. The Dow has been losing blood again, despite repeated calls of a market bottom by market analysts and bloggers. The S&P 500 index is posting its biggest ever weekly decline this week. In this climate of high uncertainty, no one really knows anything better than another. People are saying the market should be in a bottom anytime soon, or even now.. Even in a bear market, prices don’t really dive down in a straight line, but make a series of lower highs and lower lows, so not having done that indicates a high level of fear among investors. The fear gauge - VIX 9(^VIX, the volatility index)0 - has shot up to another record high in intraday trading Friday.

Adding to this widespread fear is the realization that rules are constantly changing in the stock trading game. Remember the short-selling ban, which was recently imposed then lifted? Well, that may be reinstated again, but under different circumstances. On Friday afternoon, it was reported that NYSE and NASDAQ are seeking a 3-day ban on short-selling of individual stocks should they fall 20% from the prior day.

Desperate times call for desperate measures. How about closing down the global financial markets next? (It was suggested by some politicians, but thankfully not considered as a measure). It’s easy to see why many investors are choosing to sit on their hands, instead of picking up falling knives.

US Dollar Rises To 16-Month High Versus Euro

Despite the spillage of red all over the stock markets, opportunities to profit from fear have arisen in the 24-hour forex markets. The feeling of fear and dread once again is helping the US dollar in forex trading; traders are flocking to the greenback as the default safe haven currency to hold close to their hearts, causing the dollar to rally sharply against other currencies like the Euro, Swiss franc, British pound, Aussie and Kiwi dollar in the last trading day of the week.

The Euro fell to a 16-month low against the US dollar, falling through 1.3400 on Friday in the steepest one-day fall this week. GBP/USD did touch 1.7000 earlier Friday (an expected downside target) and then fell some more to below 1.6800. USD/CHF erased all of its earlier losses from early Friday and tested 1.1400.

Comments

[User 143167:]

Everyone wants to hold dollar in cash = rise in USD index = deepened credit crunch -> more people wants to hold dollar in cash

This dollar rally has become a self destruction game.

2008 Oct 11 09:50 AM

[NOWHEREMAN:]

The dollar's rally comes at the expense of the economies of the rest of the world's currencies at a time when they can least afford it and at a time when our economy can't afford it either.

The rally is helping create job losses in industries which will not be able to compete against the goods and services provided by other countries while at the same time it destroys the purchasing power of those other nations to purchase our goods.

Deflation here, inflation elsewhere.

Its not the rise itself that is the problem. Its the speed of the rise. Nations can adjust to fluctuations in currencies over a longer period of time but just like the spike in Oil, The rapidity of the rise may have unintended consequences. The rest of the world may have no choice but to try to decouple from the Dollar.

The World's Reserve currency should be relatively stable to be trusted. Fluctuations of down and then up of 15% in one year destabilize.

This does not bode well for the future. When it starts to slide again, I doubt whether the other nations will hang on to see where it stops.

2008 Oct 11 12:17 PM

[rurzag:]

Yes, strange as it may look, the dollar is scarce commodity now, as all leveraged investments are unwinding.

I think it will get stronger until the end of 2008, maybe even some time in 2009. After that we will see high inflation, TIPS replacing regular treasuries for 20 cents on a dollar thus in effect decreasing US debt fivefold at the expense of lenders. Not a preaty picture!

2008 Oct 11 02:52 PM

[Andy Abraham:]

The Yen from Japan...also has had a tremendous run... possibly due to the unwinding of the carry trade.... It is interesting ...how correlated the Yen is to the Stock Market... when the stock market goes down...the Yen goes up...interesting to see if there will be an inverse...

2008 Oct 11 03:08 PM