Why has the Dollar Strengthened as the Stock Market Falls?
Reports of more subprime related losses have sent the markets tumbling once again. The stock market is down another 100 points, putting this week’s losses in the Dow close to 500 points. Carry trades and other high yielding currencies have followed suit as more victims of the subprime fallout surface. Domestically, Sowood Capital Management, a hedge fund founded by a former Harvard Management executive suffered bond losses in excess of 10%. A Citigroup analyst also released estimates of the potential losses at Fannie Mae and Freddie Mac, whose bond holdings are estimated to have dropped by $4.7 billion. Internationally, Australian hedge fund Absolute Capital group suspended withdrawals from two of its funds as a direct result of subprime contagion. The problems have now gone global which means that the age of easy money is over. Investors and lenders in general will be far more careful about who and what they are willing to fund. Even if the markets do rebound, sentiment has shifted so dramatically that we probably won’t see 14,000 in the Dow or fresh highs in carry trades again this year. The most common question that we are being asked right now is why is the dollar rallying? The answer is because now that the global liquidation has deepened, investors are steered back into the US dollar because of its safe haven status…
Archive for July, 2007
Forex – US dollar lower early in Asian session as traders keep eye on equities
SYDNEY (Thomson Financial) – The US dollar was lower against the yen and euro early in Asian trading hours Monday as currency markets remained focussed on developments in equity markets around the world.
Friday, July 27, 2007 6:22:35 PM – The Japanese yen saw strength against the other majors on Friday in New York. The currency continued to rise against the euro and sterling and remained near a three-month high against the dollar. Trading took place as investors mulled data showing that Japanese core consumer prices fell as expected during June.
Forex – Dollar falls to 2-1/2 month low against yen ahead of Wall Street opening
LONDON (Thomson Financial) – The dollar hit a two and a half month low against the yen on expectations of a disappointing opening on Wall Street amid ongoing concerns about the health of the US economy.
The Dow Jones index of leading shares is expected to open some 120 points lower. That is more than double the losses anticipated earlier.
‘There’s a lot of nervousness in equity markets and that increase in risk aversion has helped the Japanese yen in particular,’ said Neil Mackinnon, chief economist at ECU Group.
The main reason the yen enjoys support in these risk averse times is that Japanese investors look to repatriate funds. This has helped push the dollar down to a low today of 119.44, its lowest level since May 11.
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Types of Forex Charts
Let’s take a look at the three most popular types of forex charts:
Line chart
Bar chart
Candlestick chart
The dollar edged higher against the euro on Monday, recovering from a record low as dealers awaited economic data later in the week to see if U.S. credit market turmoil has spread to other sectors. Short-term investors closed their bets against the Dollar after the euro failed to sustain gains beyond record highs 1.3847, allowing the dollar to stabilize near 12-year lows against a basket of major currencies. Analysts said “we’ve had an enormous rally in currencies against the Dollar and at some point in time people want to take some money off the table. But bearish sentiment on the dollar is still the strongest we’ve seen in some time, and any good dips in the euro are probably going to be seen as opportunities to buy again�.
While horror stories about high-yield bonds may be in the headlines these days, you should not get rid of these funds quite yet. The worries about hedge fund meltdowns and too many of them in existence as well as the history of tight spreads is not going to take down these high yield bonds. In fact, all of this attention has actually caused spreads to widen just enough for them to be able to give portfolio managers some “breathing room� so that they can earn them money in the second half. While this range is still tight it is a lot more comfortable than it has been Of course, other hedge funds are going to step up and announce similar problems. However, the crisis should not spill over into equities and they also should not severely damage high-yield bonds. Sellers are not going to be stirred by the rash of junk-bond funded leverage buyouts. In fact, the tidal wave of private-equity deals are merely “speed bumps� that will test people but if you are patient, you will come through this just fine.
