Subscribe to Dollars & Sense magazine. Recent articles related to the financial crisis. Inflection Point for Dollar as Risk Haven?From The Financial Times:Speculation grows over dollar's turning pointBy Peter Garnham Financial Times Published: August 11 2009 19:31 | Last updated: August 11 2009 19:31 Just a week after the dollar hit its lowest level for 10 months, the main talking point in FX markets is whether the US currency is about to strengthen. The change of sentiment has been sparked by last week's US payrolls report, which saw far fewer job losses in July than expected. This strengthened the view that the US is past the worst of its recession and that its economic recovery could precede that of Europe and Japan. "Markets are in a flurry of debate about whether Friday's US payrolls data marks an inflection point for FX, whereby good US economic news starts to benefit rather than hurt the dollar," says Ray Farris at Credit Suisse. Hans Redeker at BNP Paribas says there are signs that the US economy has responded positively to the massive US fiscal and monetary stimulus, thus reducing the risk premium for holding US assets. "The introduction of quantitative easing in March has let the performance of the dollar diverge from the guidance of real interest rate differentials," he says. "Now, as the economic outlook has stabilised, the relative yield and interest rate differentials should regain their impact on currency markets." Others are hesitant to call an end to the trend of dollar weakness, given that the currency's rebound has been based on its reaction to a single piece of economic data. Read the rest of the article Labels: bailout, currencies, dollar, financial crisis, foreign exchange, macroeconomics, Monetary Policy, Peter Garnham Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Dollar's Slump Erases Months Of GainsFrom today's Washington Post. Keep your eye out for the cover story in our January/February issue, which will address, among other things, whether the dollar will remain the world's reserve currency.By Anthony Faiola Washington Post Staff Writer |Thursday, December 18, 2008 The dollar yesterday staged one of its biggest one-day drops against the euro and fell to a 13-year low against the Japanese yen as near-zero interest rates and the Federal Reserve's plan to print vast sums of cash dilute the value of the greenback. The drops dramatically accelerated the dollar's reversal of fortune over the past three weeks after months of solid gains. The slide underscores the risks the Federal Reserve is taking to jump-start the U.S. economy through aggressive monetary policy. On Monday, the Fed cut its target for the federal funds rate, at which banks lend to each other, from 1 percent to a target range of 0 percent to 0.25 percent, and effectively vowed to print as much money as it needs to try to pull the United States from a worsening recession. While that policy may ultimately aid an economic recovery, it is robbing the dollar of value as investors anticipate less interest on their dollar-denominated investments and more bills in circulation, making each one worth a bit less. In response, investors are dumping the dollar and buying up other currencies. If the dollar's fall is unchecked, it could jeopardize the long-term faith of foreign investors in the value of the American currency and could cause foreign investors to dump U.S. stocks and other assets, whose value would be worth less in euros or yen. The Dow Jones industrial average fell 1.1 percent yesterday. Read the rest of the article. Labels: currencies, dollar, euro Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Something Else To Worry AboutThe Financial Times' John Authurs on last week's other (besides the US jobs reports) big event affecting the markets:Long View: Eyes on the renminbi By John Authers Financial Times Friday Dec 5 2008 16:45 In a year when we have all grown used to extreme numbers, this week was book-ended by two shocking figures. Only one seems shocking at first to those outside the market. The news came on Friday that more than half a million jobs were lost in the US last month, the worst month in more than a quarter of a century. The week began with the news that the Chinese renminbi had depreciated by 0.73 per cent on Monday. This appears trivial by comparison, but generated almost as much concern as the news on US jobs later in the week. Why? Read the rest of the article Labels: China, currencies, financial crisis, Financial Times, John Authers Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Good Survey: How Bad in Emerging Markets?From Der Spiegel (translated into English, though). Hat tip to Yves SmithSPIEGEL ONLINE 11/04/2008 04:54 PM THE GHOST OF ARGENTINA What Happens when Countries Go Bankrupt? By SPIEGEL Staff First it was mortgage lenders. Then large banks began to wobble. Now, entire countries, including Ukraine and Pakistan, are facing financial ruin. The International Monetary Fund is there to help, but its pockets are only so deep. No, Alexander Lukyanchenko told reporters at a hastily convened press conference last Tuesday, there is "no reason whatsoever to spread panic." Anyone who was caught trying to throw people out into the street, he warned, would have the authorities to deal with. Lukyanchenko is the mayor of Donetsk, a city in eastern Ukraine with a population of a little more than one million. For generations, the residents of Donetsk have earned a living in the surrounding coalmines and steel mills, a rather profitable industry in the recent past. Donetsksta, a local steel producer, earned 1.3 billion euros ($1.65 billion) in revenues last year. But last Tuesday the mayor, returning from a meeting with business leaders, had bad news: two-thousand metalworkers would have to be furloughed. Lukyanchenko doesn't use the word furlough, instead noting that the workers will be doing "other, similar work." But every other blast furnace has already been shut down, and one of the city's largest holding companies is apparently gearing up for mass layoffs. Under these conditions, how could panic not be rampant in Donetsk, the capital of Ukraine's industrial heartland? In Mariupol, a steelworking city, a third of the workers have already been let go. The chemical industry, Ukraine's second-largest source of export revenue, is also ailing. In the capital Kiev, booming until recently, construction cranes are at a standstill while crowds jostle in front of currency exchange offices, eager to convert their assets into US dollars. Donetsk is in eastern Ukraine, 8,100 kilometers (5,030 miles) from New York's Wall Street and 2,700 kilometers (1,677 miles) from Canary Wharf, London's financial center. But such distances are now relative. The world financial crisis has reached a new level. No longer limited to banks and companies, it is now spreading like wildfire and engulfing entire economies. It has reached Asia and Latin America, Eastern Europe, Iceland the Seychelles, the Balkan nation of Serbia and Africa's southernmost country, South Africa. It is a development that has investors and speculators alike holding their breath. Some are pulling their money out of troubled countries, while others are betting on a continued decline -- and in doing so are only accelerating the downturn. Central banks are desperately trying to halt the downward trend, but in many cases the plunge seems unstoppable. Read the rest of the article Labels: currencies, Der Spiegel, Emerging markets, financial crisis, financial crisis bailout, IMF, World Bank, Yves Smith Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Swap Lines Extended To At-Risk CountriesAs we expected (see blog post of October 22nd, "Not a Slow News Day"), the Fed has extended a lifeline facility to a number of pivotal, mainly emerging economies (Brazil, South Korea, Mexico and Singapore), whose currencies have been falling through the floor as a result of mass-repatriations under the impetus of the rush to safety in the US dollar. As usual, Yves Smith was on the ball:Wednesday, October 29, 2008 Fed Establishes New IMF Facility. Dollar Swap Lines with Brazil, South Korea, Mexico, and Singapore ... Today, the Fed provided Brazil, South Korea, Mexico, and Singapore with dollar swap lines of $30 billion each (hat tip readers Robertm, Dwight). From the Fed's press release: Today, the Federal Reserve, the Banco Central do Brasil, the Banco de Mexico, the Bank of Korea, and the Monetary Authority of Singapore are announcing the establishment of temporary reciprocal currency arrangements (swap lines). These facilities, like those already established with other central banks, are designed to help improve liquidity conditions in global financial markets and to mitigate the spread of difficulties in obtaining U.S. dollar funding in fundamentally sound and well managed economies. Federal Reserve Actions In response to the heightened stress associated with the global financial turmoil, which has broadened to emerging market economies, the Federal Reserve has authorized the establishment of temporary liquidity swap facilities with the central banks of these four large and systemically important economies. These new facilities will support the provision of U.S. dollar liquidity in amounts of up to $30 billion each by the Banco Central do Brasil, the Banco de Mexico, the Bank of Korea, and the Monetary Authority of Singapore. These reciprocal currency arrangements have been authorized through April 30, 2009. The FOMC previously authorized temporary reciprocal currency arrangements with ten other central banks: the Reserve Bank of Australia, the Bank of Canada, Danmarks Nationalbank, the Bank of England, the European Central Bank, the Bank of Japan, the Reserve Bank of New Zealand, the Norges Bank, the Sveriges Riksbank, and the Swiss National Bank. Read the rest of the post Labels: currencies, Emerging markets, financial crisis bailout, IMF, The Fed Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Explaining Yesterday's Mega-RallyMany people may still be a little puzzled by the impressive surge on Wall Street yesterday, despite the clear preopnderance of gloomy news (though taking into account the near-certainty of a big Fed cut today). The answer involves the yen carry trade, about which we posted a couple of items last weekend. Today's Financial Times takes up yesterday's story:Overview: Relief-rally but worldwide uncertainties persist By Dave Shellock in London and Michael Mackenziein New York Tuesday Oct 28 2008 16:30 Global equities staged a big rebound led by Asian and US markets as a sharp fall in the Japanese yen infused bargain-hunting for risky assets and offset grim US economic data. The improvement in investor risk appetite also extended to emerging market assets - which have come under severe pressure lately - as the yen registered sharp declines against its leading rivals amid talk of currency intervention and even a possible rate cut by the Bank of Japan. Ashraf Laidi, chief currency strategist at CMC Markets, said: "Yen-selling intervention would not be successful as long as Japan does not cut interest rates." Read the rest of the article Trying to jumpstart carry trades when a lot of emerging markets are still experiencing exceptional currency volatility is risky. Accordingly, the FT noted a just today: Yen rallies as growth fears return By Peter Garnham Wednesday Oct 29 2008 06:45 The turmoil on global currency markets continued on Wednesday as the yen advanced amid fears over a global economic slowdown. The yen's rally erased some of its losses during a volatile trading session on Tuesday. Maurice Pomery at IDEAGlobal said predicting moves on the currency market was close to impossible amid a lack of liquidity and increasingly volatile price action. Read the rest of the article Right now, Wall Street is pretty much flat. The Fed will cut later in the day, and China has already done so, so there may be a continued upside. But, to quote the latter article again, from Maurice Pomery, "Expect the unexpected and we see wild swings through this week continuing," Labels: currencies, Emerging markets, financial crisis, Financial Times, stock markets, The Fed Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Asia and the Meltdown of American FinanceFrom the fine MRZine site, Japan scholar R. Taggart Murphy provides a breezy, accessible discussion of some important history:Asia and the Meltdown of American Finance by R. Taggart Murphy The boardrooms and finance ministries of Seoul, Bangkok, Jakarta, and Kuala Lumpur are today filled with a fair degree of schadenfreude at America's troubles. Schadenfreude is not a very nice emotion; Theodor Adorno once defined it as "unanticipated delight in the sufferings of another." But asking Asia's business and governing elites to repress shivers of pleasure at the meltdown of the American financial system is probably demanding more than flesh and blood can bear. The spectacle of the politicians, pundits, and academics of Washington and Chicago thrashing about in attempts to justify the vast amounts of money being shoveled at their, um, cronies on Wall Street is just a little too rich. Particularly since much of the money will have to be borrowed from the very people who a decade ago at the time of the so-called Asian Financial Crisis were being pooh-poohed for their "crony capitalism," "opaque" banking systems, "incestuous" government-business relations, not to mention their supposed absence of transparent financial reporting, good corporate governance, or accountable executives and regulators. But the glee in seeing the United States hoisted by its own petard must surely be mixed with a good deal of apprehension. Not only because Asia cannot escape this crisis unmarked. But because the crisis could conceivably force Asia's elites to engage in the open political discussions they have largely avoided until now -- discussions about the kinds of economies they expect to shape in the wake of the American debacle; discussions that carry with them all kinds of risks. Read the rest of this post Labels: Bretton Woods agreement, currencies, financial crisis, Monthly Review, R. Taggart Murphy Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Related Post on Fed Balance SheetFrom Brad Setser:One easy thing China could do to help stabilize global markets: buy Agencies! Posted on Saturday, October 25th, 2008 by bsetser There is constant talk -- too much, in my view -- about whether sovereign funds will come to the rescue of western financial institutions. Qatar did put a large sum of money into Credit Suisse recently, but in general the Gulf funds are reeling from large losses on their existing portfolio even as they are facing increased domestic demands (see Mufson and Pan of the Washington Post and Steven Johnson of Reuters) . "Rescuing*" US banks but not your own countries' markets -- and our own countries financial institutions -- is hard. And some Gulf countries' ability to carry out their ambitious local development plans will hinge on the availability of financing from their sovereign funds is oil stays at its current levels. China is still cash rich. But the CIC has yet to prove that it can manage a $100 billion balance sheet (its "frozen" investment in the Reserve Primary Fund is the latest case in point) let alone manage a US or European financial institution with a far larger balance sheet. Moreover, it would seem a bit bizarre -- at least to me --for the US taxpayer to guarantee the liabilities (and thus be on the hook for most future losses) of an institution that is effectively owned by China's government. As Uwe Reinhardt notes, US taxpayers are already on the hook for most of the downside -- and handing over both the upside and control to another country's government (typically a non-democratic government) hardly achieves the goal of keeping major financial institutions in private hands. Read the rest of the post Labels: currencies, Fannie Mae, Fredddie Mac, People's Bank of China, The Fed Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Safe Haven Musical Chairs......in a room with no furniture (or roof)?This is going to really complicate attempts to stop the bloodletting. From Marketwatch LONDON (MarketWatch) -- The U.S. dollar surged against the euro and the British pound Monday, but lost ground against ever-resilient Japanese currency as safe-haven flows trumped a G7 warning over "excessive" yen volatility. "Fear continues to grip global markets and traders are piling into whatever safe havens they can find," said James Hughes, analyst at CMC Markets. The dollar slipped to 93.30 yen in recent trade after touching a low of 92.02 earlier in the day. That's down from 94.18 late Friday. The dollar fell as low as 90.90 yen on Friday, the yen's strongest level versus the dollar since August 1995. "We are concerned about the recent excessive volatility in the exchange rate of the yen and its possible adverse implications for economic and financial stability," the G-7 said in a joint statement issued Monday morning. "We continue to monitor markets closely, and cooperate as appropriate," they said. Strategists said the statement shows high potential for coordinated intervention aimed at arresting the yen's strong rise. Meanwhile, the dollar lost ground against the Swiss franc, a traditional safe-haven, to change hands at 1.1590 francs, a loss of 0.7%. The dollar, however, has enjoyed safe-haven status of its own, boosted in part by repatriation as U.S. investors flee emerging markets and other overseas investments. Labels: currencies, financial crisis Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Crisis Focus Turn: To Currencies, and EuropeYves Smith posted yet another absolutely essential entry on how the focus on the crisis is rapidly turning to currencies, and on what some of the responses might be as the crisis becomes acute. Reuters indicates S&P futures are trading up in early Monday Asian trading. From the post:Stephen Jen, currency chief at Morgan Stanley, says the emerging market crash is a vastly underestimated risk. It threatens to become "the second epicentre of the global financial crisis", this time unfolding in Europe rather than America. ... Yves again. Now the meltdown may resume Monday, but another scenario may play out. Recall 40 nations (EU and Asian) met in Beijing over the weekend, endorsing Nicolas Sarkozy's call for a revamping of international banking regulations and more coordinated, tougher supervision. None of this directly addresses the looming currency crisis, but the markets sold off badly Friday, and if there is any stabilization or reversion on Monday, the backing away from the abyss plus the hope that the next phase of meetings, scheduled for November 15 in Washington DC, might ameliorate the situation, may put the currency crisis in abeyance for a couple of weeks. ... In this fraught environment, for China visibly (and the key is visibly) to start buying other currencies would have a disproportionate effect on psychology (and be rewarding to China, since it would profit from the rally it helped engineer). That might stem the panicked capital flight, and while it is probably insufficient to restore real stability, it could keep a necessary (and painful) revauluation/readjustment process from morphing into a rout. Read the post Labels: currencies, financial crisis, Yves Smith Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Carry Trade: Key To Understanding Crisis TurnA fine piece by the Financial Times' John Authurs on the unwinding of this trade, and the impact it has been having on the recent, otherwise partially inexplicable, US dollar strength. Understanding this trade is absolutely essential to understanding the turn the crisis has taken. Apologies for the image: it's the only link I can find to this article.Read the article "Chaos Carries a Risk for Emerging Markets" Labels: currencies, Emerging markets, financial crisis, John Authers, Yen carry trade Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Interpreting Friday's CrazinessSome snippets from today's Financial Times lead piece. All are horrific.Looming recession batters stocks By Michael Mackenzie in New York and Michiyo Nakamoto in Tokyo and Song Jung-a in Seoul Friday Oct 24 2008 12:10 Traders said the massive reversal of currency positions in favour of the yen, reflected further liquidation of the so-called "carry trade", in which investors had borrowed at low Japanese interest rates to fund risky global investments. . . . The sharp rise in the yen forced further sales of risky assets, with equities, commodities and emerging markets suffering sharp declines while investors sought the safety of owning short-term government paper. Redemption requests from investors in mutual and hedge funds intensified the wave of forced selling. . . . "The magnitude of such historical market moves in currencies could only be the result of imploding hedge funds leading to massive liquidations," said Ashraf Laidi, chief currency strategist at CMC Markets. . . . Kazuyuki Sugimoto, vice finance minister, warned that rapid and excessive currency moves were not desirable for the economy, prompting speculation that the government might intervene in the currency markets or that the Bank of Japan might cut interest rates. However, analysts said neither move would be effective. . . . But one thing from the print version of the same article really caught my eye: Jack McDonald, president of Conifer Securities, a prime brokerage for small and medium-sized hedge funds said: "Funds will only have a good idea about the actual size of redemptions towards the end of November." That will be something to look forward to, indeed. If we make it that far. Read the rest of the online edition article Labels: currencies, Emerging markets, financial crisis, hedge funds Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). |
