Reply #43: dollar watch

[UpInArms]

http://quotes.ino.com/chart/?s=NYBOT_DX&v=i

Last trade 83.711 Change +0.030 (+0.04%)

Dollar Losing Its Safe Haven Status As Risk Rises And Returns Plunge

http://www.dailyfx.com/story/currency/eur_fundamentals/Dollar_Losing_Its_Safe_Haven_1229133167756.html

Has risk sentiment taken a significant turn for the better or is the dollar losing its status as a safe haven currency? This is the fundamental question for dollar traders and even to those participants in other currencies and securities. This past week, month-long congestion patterns behind the major pairs finally broke down. Breakouts were inevitable; but considering the depressed levels of sentiment and the dour outlook for the global economy, the fundamental lean was towards a revival of the bearish trend that has found deleveraging favoring the world’s most liquid currency. So, was this reversal from the dollar represent a significant shift in the risk? Unlikely. The Japanese yen (the other key flight-from-risk currency of choice) actually rallied against its liquid counterparts after the US Congress struck down heavily debated rescue for the ailing auto industry. Next week, the market will have to see whether the Treasury will fulfill the White House’s proposal for a temporary bridge loan until a better solution can be found. However, looking deeper into the issue, figures that have been thrown out will not likely stabilize this teetering industry. What’s more, the car manufacturers are not the only one’s suffering, nor is the US the only nation that is seeing its rescue efforts coming up far short of turning economies and thawing credit.

The other question that the dollar’s reversal raises is whether the currency is losing its safe haven status. Initially, the distinct seizure of the financial markets beginning in October sparked a sense of panic and sent funds on the hunt for safety in the form of liquid, stable and essentially risk-free Treasuries. However, this extreme in sentiment has since clearly tempered - though caution is still holding to historical highs. A sense of stability has allowed investors the luxury of reassessing where their funds would be safest. Demand for treasuries is still at record highs as is seen in the negative yield in short-term T-bills recently. On the other hand, the outlook for growth in the US is particularly ominous and the need for bailouts from large industries compromises the sanctity of the government’s guarantee – not to mention the hope for any level of return on idle capital.

There is a third scenario for the dollar’s future that should be considered as it the most probable. With the majors coming to the end of their highly visible congestion patterns, their was a clear need for resolve. However, reviving the dominant bear trend would present a significant market shift just as liquidity was fading into the year end. The least evocative option was for a dollar reversal that broke with risk trends. At the same time, this could be a temporary divergence that lends itself to a congestion scenario for the market in general through the year’s end. This theory will be put to the test immediately next week with the Fed’s rate decision on Tuesday. Though heavily priced in, a 75 basis points rate cut to 0.25 percent (according to Fed Funds futures) will gauge the market’s sensitivity to the balance of risk/reward that will become more prominent when confidence returns. The other major mover could be any news on US bailout efforts. Should these events trigger a bigger move in the dollar, this could be a volatile holiday period.



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All Yield to the Euro

http://www.bktraderfx.com/site/fx-weekly-reports/fx-weekly-1212-1908-all-yield-to-the-euro

The seminal event for the currency market this week happened on Tuesday. That’s when the four week T-bill auction produced in a negative yield
and suddenly the greenback did not look so green. As we told CNBC’s Patti Domm, “Basically, everybody woke up and decided yield was more important than safety.” And yield continued to be the dominant story of the week as EUR/USD powered on towards the 1.3400 handle.

We remain highly dubious of ECB’s ability to keep rate above 2% in the long run. We wrote on Thursday, “Despite the euro’s recent rise, we believe the market is far too optimistic about ECB’s hawkishness.Although the EZ monetary officials are much more reluctant to ease rates than their G-4 counterparts, they will inevitably have to follow their colleagues as economic growth begins to slow markedly.With demand already at record lows, unemployment in the region will begin to rise sharply forcing Mr. Trichet and company to become much more accommodative as 2009 progresses.”

But as Lord Keynes said, “In the long we are all dead.” In the meantime the flow is to the euro and next week’s FOMC meeting is unlikely to provide any support for the dollar as US rates could sink to 25bp giving the buck the dubious honor of having the lowest yield in the G-10 universe. Still 1.3500-1.3600 zone is likely to bring out some sellers, so while the rally in the euro may continue we believe it may be limited in scope given the difficulties on the other side of the Atlantic.

Next week will be the final full week of trade in the currency market for 2008 and as we approach the end of the year liquidity is sure to dry up as traders thoughts turn to Aspen and St. Moritz (although given this challenging year in finance - it may well be the Pocono Mountains and Austria for most). In any event, trade is likely to slow materially as we approach the holidays, unless we get hit with yet another wave of risk aversion as the year comes to a close.

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