Sunday, November 26, 2006

The Dollar Took a Hit on Friday

A lot of real estate bulls have placed their hopes for a spring rebound on the expectation that interest rates will start to come down again. If the dollar continues to fall, as it did on Friday, the chances that the Fed would lower rates will continue to diminish. If the Fed is given a choice to save housing by lowering rates or saving the dollar by raising rates, it will pick the latter, always.

[THE euro climbed above $1.30 on Friday, hitting its highest level since April 2005, with further gains predicted in the months ahead. The dollar fell sharply at the end of last week on fears about the US economy, unsettling financial markets.

The dollar’s fall had a knock-on effect on a wide range of markets. The price of crude oil rose in dollar terms as a direct reflection of the American currency’s weakness.

“The dollar is the big story,” said Nick Stamenkovic, an economist with RIA Capital. “The question is whether it has been exaggerated by thin markets.”

US trading was quiet ahead of the weekend as a result of the Thanksgiving Day holiday.

“The break of 1.30 is a strong signal that the dollar has to weaken,” said Carsten Fritsch, a currency strategist at Commerzbank in Frankfurt.]

Full article...


Anonymous Anonymous said...

Federal Reserve Bank of St. Louis President William Poole, in a rare challenge to the financial markets, says interest-rate futures are wrong most of the time in predicting benchmark overnight lending rates.

Eurodollar futures have an accuracy rate of less than 30 percent since 1994 in forecasting the target rate for overnight loans between banks six months later, the St. Louis Fed said in an August study. There are $10.3 trillion in Eurodollar futures contracts, which predict a three-month rate that closely tracks the forecast for the central bank target. They now show the Fed may lower its rate to at least 4.75 percent next year.

``Those are the best forecasts we have, but they're simply not very accurate at the end of the day,'' Poole said in an interview last week. Poole is a voting member of the Federal Open Market Committee, which kept the rate unchanged at 5.25 percent the last three times it met this year.

Sunday, November 26, 2006 9:46:00 PM  
Anonymous Anonymous said...

Many banks are betting the Federal Reserve will cut short-term interest rate targets in 2007, according to a Bear Stearns report issued Monday.

Banks' earnings are tied closely to the Federal Reserve's interest rate targets. Banks flip short-term borrowings into long-term loans and profit from the discrepancy in long- and short-term rates. When the Federal Reserve raises short-term interest rate targets, the higher cost of borrowing money squeezes banks' profits.

Sunday, November 26, 2006 9:49:00 PM  
Anonymous Anonymous said...

U.S. stocks could face a challenge next week to bounce back from Friday's post-Thanksgiving drop unless there's some tempering of the dollar's weakness that sparked the sell-off.

We may be entering a period of trouble for stocks and a sharp drop in the dollar may provide more excuses to sell," said Michael Metz, chief investment strategist at Oppenheimer & Co. in New York..

Sunday, November 26, 2006 9:54:00 PM  
Anonymous Anonymous said...

Thanksgiving weekend wasn't exactly peaceful for the world’s central bankers. On Friday the dollar capped a down week with a near-vertical fall that only stopped because the markets closed. So while the rest of us were watching TV and blissfully pigging out, our economic policy makers spent two anxious days contemplating Monday’s open and the possibility that, with global trade imbalances at unsustainable levels, China actively diversifying out of dollars and Iraq dissolving into civil war, the dollar has finally entered its death spiral.

A year or two ago this wouldn’t have been so stressful. Instead, first thing Monday morning the response would have been swift, decisive and, maybe, two-pronged. Central banks would have bought dollars and dumped yen and euros to prop up the dollar (that’s the public prong). Meanwhile (according to a growing number of serious people), shadowy arms of the U.S. Treasury and foreign central banks would have secretly dumped gold and bought up large cap stocks to give the appearance of business as usual in the financial markets. And the markets would have stabilized, with most of us never noticing a thing.

The group doing this hypothetical secret manipulating is commonly known as the “Plunge Protection Team.” The term was coined by the Washington Post in a 1997 article about an interagency “Working Group” that formed after the 1987 crash to address such situations in the future:

Without taking a stand on the existence or behavior of the PPT, it's clear that this kind of manipulation is highly doable. It only takes a little capital to move a thinly traded market like gold at 2AM, and central banks have an infinite amount of paper currency at their disposal. So in theory it would be easy for the PPT—or even a rogue trader at Treasury or the European Central Bank—to help the dollar and euro by temporarily chasing speculators out of gold. Or by pushing up the price of any given stock, even a large-cap Dow component like GM.

But technically doable doesn’t mean risk-free. This time around the sound-money community is onto the game, and the crowd watching for PPT footprints has grown into an army. So IF there is a PPT and IF it routinely messes with gold and stocks, then its operatives have a real dilemma. Tonight and tomorrow would be ideal—maybe crucial—times to smack gold and boost stocks, but doing so runs a heightened risk of exposure, thanks to the suddenly large number of eyes on these markets and the ability of the Internet to force-feed fringe ideas to the mainstream media.

The Whole World is Watching.

Sunday, November 26, 2006 10:34:00 PM  
Anonymous Anonymous said...

China's currency rose to a fresh high against the US dollar on Monday, as the central bank set its rate at 7.8402 yuan per dollar, the highest level since the current exchange system was set up in July 2005.

Monday, November 27, 2006 12:39:00 AM  
Anonymous Anonymous said...

Marco hedge funds are shorting homebuilding companies by selling the common stock and buying credit-default swap protection, to position for a downturn in the U.S. housing market.

Thursday, November 30, 2006 2:19:00 AM  

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