Dollar Holds Firm, Less Affected by Volatility

Global stock markets have traded higher after central banks from the US, Eurozone, UK and Switzerland worked in coordinated effort to pump unlimited US dollars (which used to be capped) into the global financial system Monday, and following the announcement of various central banks working hard and pledging their resolve to “not let banks fail” and “doing all they can to support the financial system”. Economically, nothing has been altered in a perceivable way, but psychologically, that is a boost to investors’ confidence. Credit markets, and not to mention the stock markets, basically work on the basis of confidence, so that explains the rise in Asian, European and US stocks today.

Are we going to see a major return to carry trades as a result of this “global effort”? Hardly . Although the US dollar initially lost its footing, it later rebounded to trade higher against many currencies like the Euro and Swiss franc in forex trading. As long as people are feeling the heat from the ongoing economic and financial turmoil, the US dollar is likely to retain its uptrend bias of higher highs and higher lows (not in a straight rally of course).

Stock investors are still spooked and will be spooked by the slightest mention of any failure in the financial sector. Brave ventures into stock bargain-hunting will be laden with tons of doubt - doubt about the economy, doubt about the company and doubt about one’s decision-making skills should things turn unfavorable.

This vulnerable return of risk appetite has led traders to cover their shorts on high-yielding currencies such as the Aussie and Kiwi dollar in the forex markets, resulting in their rebound Monday versus the US dollar. Meanwhile, yen-paired currency pairs like USD/JPY, EUR/JPY and GBP/JPY have rallied today, taking their cues from the stock markets.

Economic Calendar For Tuesday:

UK CPI, retail price 0830 GMT

German ZEW 0900 GMT

ECB’s Trichet speaks in New York 1615 GMT

Comments

[phdinsuntan...:]

Dear Grace, I guess that with unlimited dollar pumping makes more sense that you report the currency/gold pair too...

2008 Oct 13 03:30 PM

[User 265729:]

We've managed to have every country in the world follow our lead by getting the currency printing presses rolling. In the end, it is all relative, and they have reached a type of balance. If you call it that...

2008 Oct 13 03:51 PM

[NOWHEREMAN:]

Yes indeed, 3 month LIBOR has dropped from 4.8 to 4.6 currently. Wow, we must be doing something right.

Uncut discount rate=4.8
Discount rate drops .50, LIBOR drops .20 hmmm.

The real rate has increased by another .30.

Someone seems to think more cockroaches are lurking under other rocks. That somwone seems to be the Banks themselves.

2008 Oct 14 09:59 AM

[NOWHEREMAN:]

someone not somwone.

2008 Oct 14 10:01 AM