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Why has the Dollar Strengthened as the Stock Market Falls?

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…

Source: Daily FX