Why did the dollar go up today?

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okubow's picture
okubow
Status: Bronze Member (Offline)
Joined: Aug 16 2009
Posts: 67
Why did the dollar go up today?

Yesterday the Fed announced that it would keep the target federal funds rate at 0 to .25%. So why did the Dollar index go up?

Doesn't the Fed's decision to keep interest rates low send a bad signal? (ie. They're ready to keep injecting cheap money into the economy.)

Or is the signal that the Fed is fearing deflation? (This would suggest that the dollar is a safe place to park some cash for the time being.)

Also . . .

Is breaking below 75 some kind of pyschological barrier for the dollar index?

Would be great to hear some commentary from the seasoned investors out there.

strabes's picture
strabes
Status: Diamond Member (Offline)
Joined: Feb 7 2009
Posts: 1032
Re: Why did the dollar go up today?

Fed announcements are just 1 variable in an impossibly complex dollar equation.  So the announcements are powerful, but they're not the sole determinant.  Generally its announcements/decisions follow markets rather than driving them (see the collapse of 08!).  But this announcement is clear, despite all the bureaucratic fluff language, that deflation is its main concern...maintaining 0% rates.

Dollar goes up on any given day simply because people buy it.  Why would people buy it today?  Depending on your preferred investment theory, one can make several cases.  1) Trending: people will buy it because, after skyrocketing in 08, it's been on a long steep track downward since March...it's at the lowest level in a long time and market sentiment is like 3% bulls, all the shorts are in, so it's time for its trend to turnaround. 2) Risk preference: marginally on the day, equities were down, which is an indicator of a slight move toward risk aversion in the markets...good for dollar since it's perceived as the "safe haven" (in quotes because we all know in the long-run it's anything but a safe haven...in the shorter term, it still is).  3) Waves: Elliott Wave practitioners are calling for a major market top, i.e. dollar bottom, and the next phase of deflationary collapse is about to kick in.  4) Or if you prefer fundamentals over technical justification: the world is in major debt deflation, and as the next phase of it kicks in, global currency/bond investors will scramble for safe dollars (banks, countries, corporations are at risk of going bankrupt...the US won't...yet).

The Fed is but 1 player in the markets.  It doesn't move the markets (it only seems to when the major money center banks play along with its game, like they did in building the real estate bubble as they took advantage of low Fed rates).  I suspect the Fed is soon going to find itself helpless to stop the next wave down.

Farmer Brown's picture
Farmer Brown
Status: Martenson Brigade Member (Offline)
Joined: Nov 23 2008
Posts: 1496
Re: Why did the dollar go up today?

This answers your question, at least in my book.  Less $ liquidity = less supply = higher price:

http://www.ft.com/cms/s/0/de2f3536-a943-11de-9b7f-00144feabdc0.html  (Financial Times)


    Central banks rethink dollar loan policy

By Krishna Guha in Pittsburgh and Ralph Atkins in Frankfurt

Published: September 24 2009 21:04 | Last updated: September 24 2009 21:04

Four of the world’s leading central banks on Thursday announced plans to end the emergency supply of long-term dollar loans in Europe and scale back the provision of such finance in the US.

However, at the same time the Federal Reserve signalled it is considering making the Term Auction Facility through which it provides the dollar loans a regular feature of its liquidity management, even after the crisis is over. This facility was invented in the early stages of the crisis, in December 2007.

The moves reflect a return to more normal financial market conditions and highlight how some emergency measures taken by central banks are being gradually phased out without any grand announcement about implementation of “exit strategies”. The initiatives could still leave some lasting changes in the way central banks operate.

In a joint statement, the Fed, the European Central Bank, the Bank of England and the Swiss National Bank announced they would no longer provide 84-day dollar loans outside the US.

Meanwhile, the Fed said it was reducing the amount of longer term dollar loans it provided to US-based financial institutions from $75bn a month to $50bn (€33.5bn, £30.5bn) each month from October to January. The US central bank will also reduce the term of its domestic dollar loans from 84 days to 70 days in October and 42 days in November and December.

But the Fed said it would soon request public comment as to whether it should make the Term Auction Facility – which in effect auctions out dollar loans – permanent.

Fed officials have not reached a firm conclusion on this, but many think there could be advantages in retaining small-scale regular cash auctions.

Banks like using this facility because it does not have any stigma attached. They are reluctant to use the Fed’s longstanding discount window to borrow money as it is perceived to be a sign of weakness.

An ECB offer of 84-day dollar liquidity earlier this month attracted no bids – the first time that has happened in an ECB liquidity-providing operation since its launch a decade ago. However, the three central banks said they would continue to provide dollars on a seven-day basis.

The Fed will also continue to provide $75bn in 28-day dollar loans each month.

In the eurozone, the ECB has swamped the banking system with euro liquidity at very low interest rates, which analysts said had reduced demand for dollars. In June it provided €442bn in one-year loans.

npwebb's picture
npwebb
Status: Silver Member (Offline)
Joined: Mar 25 2009
Posts: 111
Re: Why did the dollar go up today?

Investors started to sell stocks to buy US T-bills/notes.  An upward shift in dollar demand relative to supply pushes the value of the dollar up.

okubow's picture
okubow
Status: Bronze Member (Offline)
Joined: Aug 16 2009
Posts: 67
Re: Why did the dollar go up today?

npwebb wrote:

Investors started to sell stocks to buy US T-bills/notes.  An upward shift in dollar demand relative to supply pushes the value of the dollar up.

npwebb, this was going to be my next question so thanks for the answer. So, if investors leave equity markets in large numbers, then the dollar has to go up, at least short term.(?) When you sell a US stock you get dollars, so that basically represents a de facto rise in the dollar (at least temporarily)?

Based on all of the information supplied by strabes and FB it's going to be a while before I can wrap my mind around this one.

Thanks for the insight.

Orion

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