UAE Monetary Authority ‘Stands Behind’ Local and Foreign Banks

The US dollar is now headed for the longest length of monthly declines against the euro since 2004 after the UAE’s monetary authority said it ‘stands behind’ local and foreign banks easing investor fears and putting downward pressure on the dollar. Brian Kim of UBS AG stated, “Everybody’s coming back to a dollar-under-pressure story. Now that the U.A.E. is coming in to help, people are relieved.” Against the euro the dollar fell 1.4% in November declining for the fifth straight month. Dubai World which is $59 billion in debt said on November 25th that it would seek a six month moratorium on payments to creditors sending ripples through stock and currency markets.

US Bank Exposure Limited

Some analysts pointed out that US bank exposure to Dubai debt is a manageable $9.9 billion compared with European banks that have lent the troubled company nine times as much. Richard Franulovich of Westpac Banking Corp stated, “I was shocked to see on Friday the savageness of the risk aversion that flowed from Dubai. In the cold light of day, the hard facts are it’s not a big hit there and moreover the authorities there have obviously stepped in and provided certain liquidity guarantees.” The dollar index which tracks the US dollar against six other major currencies fell 0.1% to 74.892 for a monthly decline of 1.8% in November.

Yen’s Rise Hurting Exports

The Japanese yen declined after a Japanese government minister said that the Japanese government will intervene to attempt to stem the yen’s rise. The yen’s rise of 5.1% against the greenback is hurting the profits of major exporters such as Sony and Toyota. Japanese strategy minister Naoto Kan who is also a deputy Prime Minister said, “In light of the Dubai shock, we want to respond more aggressively than originally planned with an extra budget. We also want to stop the yen’s rise and cooperate with the BOJ.” Investors will be paying close attention to the European Central Bank meeting and the US jobs report due Friday.

Dollar Yen Hold Gains

The US dollar and the Japanese yen held gains due to a decline in risk sentiment and falling stock and commodity prices. US, European and Asian markets declined causing investors and traders to dump risky assets in favor of the safe haven offered by the dollar and yen. Tokyo’s Nikkei fell 0.5% and the S&P’s 500 Index suffered the worst one day percentage decline in three weeks. The dollar was also supported by banks seeking safe haven assets such as U.S. government bonds. Many traders believe that all the dollar buying is seasonal and demand from overseas corporations buying dollars in advance of years end. A Japanese trader said, “Hedge funds are cashing out their positions to prepare for year-end redemption requests from their clients. And that move is encouraging others to take profits as well.”

Bank of Japan Holds Rates Steady

The Bank of Japan held present interest rates, a move that was widely expected, and offered an improved assessment of the Japanese economy. The Kiwi dollar extended Thursday’s losses of 2% and against the greenback traded at $0.7256. The Aussie dollar which fell 1.6% on Thursday was helped by a Japanese asset manager who bought Australian dollars against the yen.

Trichet’s Remarks

Market reaction was subdued after remarks by ECB President Jean Claude Trichet who said it was too early to declare the recession over. Trichet also said that exceptional monetary policies would have to be phased out gradually. In a Speech at the 19th Frankfurt European Banking Congress Trichet said, “The mood in the financial system is one of relief. But as of today, it is too early to declare the crisis over.” About emergency measures Trichet stated, “Emergency treatment and strong medicines are sometimes necessary. But, if their use is prolonged, they can lead to dependence and even addiction.” Light trading is expected next week as Japanese markets close on Monday for a national holiday and US markets will close Thursday for Thanksgiving.

Interbank Rates Hit Record Lows

Interbank lending rates hit a record low on Wednesday (Nov.18) as investors speculated that governments and central banks will keep stimulus programs in place well into 2010. The LIBOR three month dollar rate (London interbank offered rates) fell to 0.26906% while the euro LIBOR rate rose slightly to 0.67500% according to the British Bankers Association. The pound LIBOR fell after minutes from the Bank of England’s meeting showed that the central bank may expand the bank’s quantitative easing programs to 200 million pounds. ($334,815,776 USD) Stephen Lewis of Monument Securities stated, “A reduction in this rate would bear down on short-term market rates, perhaps shaving a few basis points off borrowing costs. Probably wisely, members decided that any easing in monetary conditions achieved by this means would be on a scale unlikely to make much difference to demand in the economy. However, the MPC agreed to keep the remuneration rate under review.”

Fed Will Keep Rates Low

Rates in money markets have hit record lows as record low interest rates and central bank injections of liquidity have combined with policymaker’s promises of the continuation of stimulus programs are keeping rates at record lows. Last week the US Federal Reserve indicated that it would continue to keep interest rates near zero in an attempt to stimulate US economic recovery. In the euro zone there is a continuing debate on how much the ECB will inject in one year funds into a market already flooded with cash.

Dollar Declines Against Major Currencies

On Wednesday the US dollar fell against most major currencies as investors took profits on the dollar’s recent rally and the view that US rates will remain low well into 2010. Many traders say the greenback’s long term fall will continue because although the Federal Reserve has indicated it may withdraw some stimulus measures it is still a long way from raising interest rates. St. Louis Federal Reserve President James Bullard indicated that the Fed will tighten policies by adjusting emergency asset purchasing programs instead of raising interest rates.

Dollar Pulls Back From 15 Month Low

The US dollar rose from a fifteen month low as investors tried to fathom whether the global economic outlook justifies the rise in higher yielding currencies and assets. On Monday the dollar weakened as US unemployment data and the results of last weekend’s G 20 meeting prompted investors to speculate that US interest rates would remain at historic lows. The British pound fell sharply after Fitch’s Ratings said that the UK government was the most at risk of having its triple AAA rating lowered if the government engaged in new stimulus programs. Andrew Wilkinson of Interactive Brokers Group stated, “With many currencies reaching new highs recently, there is a reasonable amount of resistance toward a headlong lunge into fresh territory for now.”

German Investors Pessimistic

The euro vs. dollar fell 0.2% to $1.4957 just short of the $1.50 mark and against the yen the dollar was down 0.1% to 89.87 yen. The dollar index, DXY, rose 0.2% after hitting a fifteen month low on Monday. The euro was pressured by German ZEW results which showed that investors were more pessimistic than during the past four months. Concerns that investors have become overly optimistic pressured recent winners like the Aussie dollar which declined 0.3% against the US dollar to $0.9274.

Fed has Cautious Outlook For Recovery

US Federal Reserve officials struck a cautious note on Tuesday about US economic outlook. Disappointing economic data from the US points to a slow recovery and rates are expected to remain at near zero for an extended period. The Canadian dollar got a bit of good news as oil prices climbed above $80 a barrel. The Canadian dollar or ‘loonie’ rose to 95.26 US cents. Promises by the G 20 group of nations to keep stimulus measures in place also benefited the loonie. Mixed economic signals from the euro zone pressured the euro. Italy and France reported sharp falls in output while Germany reported a surge in production.

Dire Predictions

Pundits and some economists have been writing about the possible demise of the US dollar for years. Many of these articles are alarmist in tone and have titles like “The Coming Global Collapse” and most are based on speculation. Despite these dire predictions investors and traders remain unalarmed. Some analysts believe that a sharp drop in the dollar or market volatility could create a crisis of confidence in the US dollar and its role as a global reserve currency.

US Deficits Cause Concern

Some investors are concerned about the United State’s ability to fund massive deficits and some nations, most notably China, have expressed concern about the sustainability of the dollar’s reserve currency role in global economics.  Rising stocks and well received auctions of US Treasuries suggest that most investors have confidence in the dollar. The US dollar has fallen 15% against a basket of six major currencies since March and has fallen over 37% from a 2001 high.

US to Keep Rates Low for ‘Extended Period’

The dollar vs. euro exchange rate has been steady with the euro hovering in the vicinity of $1.50, down 6% against a record euro high of $1.6040 in March 2008. Michael Woolfolk of BNY Mellon said, “If we breach $1.60. I think that’s too far, too fast and could cause concern about a dollar demise.” Low US interest rates have contributed to the dollar’s weakness and recently investors and currency traders have been using the weak dollar to fund carry trades. Most economists expect the US Federal Reserve to keep rates low for an extended period. At this weekend’s G 20 summit the International Monetary Fund warned against withdrawing stimulus policies ‘too soon.’

Weak Dollar Good for US Exports

In the US the weak dollar is looked at positive for boosting US exports even though the current Obama administration gives lip service to a strong dollar policy. Some economists warn that a weak dollar could cause a flight from US assets leading to an unhealthy rise in interest rates.

Dollar at One Month High

The US dollar hit a one month high as UK banking woes and falling stocks in Europe and Wall Street dampened risk sentiment. The pound fell on Tuesday as several UK banks underwent shake ups. Bank of Scotland shares fell 5% after the bank agreed to sell some of its businesses. Currency traders remain wary in advance of meetings of the US Federal Reserve and the European Central Bank. The Fed is widely expected to keep rates at near zero for an “extended period.” Andrew Robinson of Saxo Capital Markets stated, “We have a slew of central bank meetings starting today. It’s going to be a bit uncertain and nervous, and under the circumstances a bit of range trading.”

Aussie Falls on Rate Hike

The Aussie which has been a big winner lately fell after the Reserve Bank of Australia raised rated from 3.25% to 3.5% leaving investors guessing when the central bank would hike rates again. The Aussie fell to $0.8957 from a high of $0.9042. Other commodity based currencies rose in Asian markets after the International Monetary Fund announced the sale of 200 tons of gold to the Reserve Bank of India.

Stocks Hit Four Week Low

On Tuesday global stocks hit a four week low and UK banking troubles spurred risk aversion benefiting the US dollar. Poor results posted by UBS UBSN.VS and bank shake ups in the UK prompted investor concerns about the health of banking systems. Banking giant CIT filed for bankruptcy. David Thebault of Global Equities in Paris stated, “UBS just posted ugly results that bode ill for European bank results and CIT just filed for bankruptcy. This raises the question: isn’t it too early to pay back government money?”

G 20 Conference Ahead

Also dampening risk sentiment is the upcoming G 20 conference scheduled for this weekend in Scotland and the US jobs report due Friday. Forex traders and investors will have a slew of information to sort through this week.