Dollar Sheds Risk Trading
A Bloomberg article has pointed out that the US dollar is now rallying ‘in tandem with stocks’ for the first time since the demise of Lehman Brothers. For most of the past year the dollar has been traded on risk sentiment. Some currency experts believe that the worst may be over for the dollar. The dollar, equities and raw materials are on track for their largest two month gain since 2008 when the recession reared its ugly head. The correlation between stocks and the dollar reflects investor confidence that the US will be the first to recover from the current global recession. In the past the dollar gained as investors sought safe haven from economic turmoil. The dollar weakened when investors took advantage of record low Fed rates to finance carry trades. The dollar has also benefited from year end profit taking.
Fed to Withdraw Stimulus Packages
On December 4th the news that the US unemployment had fallen the most in three years pushed the greenback higher as investors bet that the positive data would convince the Federal Reserve to raise rates. The DXY rose 1.7%, the largest gain since January 2009 when UK banking troubles increased the demand for the safe haven offered by the dollar. Dennis Gartman wrote in the Gartman Letter, “We are witnessing a watershed shift in sentiment regarding the dollar. We do not use the term watershed often, but when we do we mean it.” Federal Open Market Committee said on Dec. 16 that it would end most emergency measures by March 2010. The Fed cited “improvements in the functioning of financial markets” The Fed cited, “improvements in the functioning of financial markets” and stabilizing labor markets as reasons for the move. Despite speculation the Fed said it would leave rates “exceptionally low” for an “extended period.”
Euro Zone Banking Troubles
The euro weakened in currency markets after the European Central Bank said that financial institutions may have to write down an additional 187 billion euros ($268 billion USD). The central bank’s loans to property companies and eastern European nations may threaten recovery in the euro zone. Mansoor Mohi-uddin of UBS AG wrote, “Sentiment in the euro zone will suffer from the fiscal troubles of its weakest members. This hurts the euro as it makes it less likely the ECB will be in a position to raise interest rates if one of its member countries faces the threat of defaulting on its debts in future.”
