Dollar Slides as Haven Allure Fades, Recession Concern Mounts
Dollar Slides as Haven Allure Fades, Recession Concern Mounts
By Andrew Macaskill
Nov. 24 (Bloomberg) — The dollar slipped against the euro and the yen as European stocks and U.S. index futures rallied after Citigroup Inc.’s government rescue, making the currency less attractive as a haven.
The greenback also fell against the Brazilian real and the South African rand as Citigroup got $306 billion of U.S. government guarantees for troubled mortgages and toxic assets after its shares fell 60 percent last week. U.S. data may show home resales dropped the most in a year in October, fueling expectations the Federal Reserve will add to last month’s two interest-rate cuts to spur growth.
“We are seeing the dollar’s haven status coming under some pressure today,” said Daragh Maher, deputy head of global currency strategy in London at Calyon, the investment-banking arm of France’s Credit Agricole SA. “Stronger equities are being driven by the Citigroup bailout.”
The dollar weakened to $1.2769 against the euro as of 7:57 a.m. in New York from $1.2590 on Nov. 21. It fell to 95.81 yen from at 95.93 yen. The euro bought 122.30 yen from 120.76. Maher sees the euro trading at $1.23 and the yen strengthening to 95 yen to the dollar by yearend.
Europe’s Dow Jones Stoxx 600 Index gained 3.9 percent and futures on the Standard & Poor’s 500 Index added 2.9 percent. Citigroup, once the biggest U.S. bank by market value, will also get a $20 billion cash infusion from the Treasury Department, adding to the $25 billion it got last month under the Troubled Asset Relief Program.
Against the Brazilian real, the dollar fell 3.1 percent. It declined 1.4 percent versus the South African rand to 10.33.
“The size of the Citigroup bailout shows how intense the financial crisis has become,” said Lee Hardman, a currency strategist in London at Bank of Tokyo-Mitsubishi Ltd. “Risk sentiment is completely impaired.”
U.S. home resales fell 3.5 percent in October to a 5 million annual pace, the biggest monthly drop since September 2007, according to the median estimate of economists surveyed by Bloomberg News. Purchases of existing homes account for about 90 percent of the U.S. housing market transactions. The National Association of Realtors’ report is due at 10 a.m. in Washington.
“The outlook in the U.S. once again has taken quite a nasty turn to the downside,” said Michael Klawitter, a currency strategist at Dresdner Kleinwort in Frankfurt. “With the corporate sector deteriorating sharply, people are becoming more hesitant about repatriating into dollars.”
Futures on the Chicago Board of Trade show 18 percent odds policy makers will lower the 1 percent target interest rate for overnight lending between banks to 0.25 percent at their next meeting on Dec. 16, compared with zero odds a week ago. The Fed reduced the rate by a percentage point in October.
The euro gained against the dollar even after a German report today showed that business confidence slumped to the lowest level in almost 16 years in November as the global financial crisis sapped demand for exports.
The Munich-based Ifo institute said its business climate index, based on a survey of 7,000 executives, dropped to 85.8 from 90.2 in October. That’s the lowest since February 1993. Economists expected a decline to 88.7, according to the median of 41 forecasts in a Bloomberg News survey.
“The number was soft but macro-economic data is not driving euro-dollar at the moment,” said Martin McMahon, a currency strategist in Zurich at Credit Suisse Group AG. “Repatriation and deleveraging is the main theme. There is so much bad news around, it’s not really news anymore.”
The pound rose against the dollar before Prime Minister Gordon Brown outlines spending plans to aid U.K. companies and consumers and Chancellor of the Exchequer Alistair Darling delivers his pre-budget report.
“The market is sensing that it will put a temporary floor under confidence and that is giving a boost to sterling,” said Neil Jones, head of European hedge fund sales in London at Mizuho Capital Markets. “But it wouldn’t be sufficient to turn around the long-term downtrend for the pound.”
Economists including George Johns at Barclays Capital estimate the Brown package may be worth 15 billion pounds ($22 billion). The costliest part of the plan may be a cut in the 17.5 percent value-added tax, a sales levy, which accounting firms and economists say Brown may reduce to spur consumer spending.
The pound traded at $1.4980, from $1.4895 on Nov. 21. Against the euro, it weakened to 84.51 pence, from 84.37 pence.
Last Updated: November 24, 2008 08:00 EST
There’s another good article on the potential weakness of the dollar by the London Banker, at http://londonbanker.blogspot.com/ . I first became familiar with the London Banker as a frequent and respected blogger on Nouriel Roubini’s Global EconoMonitor at rgemonitor.com . Now he has his own site as well.
Friday, 21 November 2008
Because hedge funds are unregulated, and prime brokerage credit isn’t well reported for aggregation, there is no obvious way to compile exact data. Nonetheless, it would be rational to assume that simultaneous global margin calls on a vast cross-section of hedge funds would have a dramatic effect on global markets. Hedge funds accounted for well over half of all market transactions in 2007, so are a huge driver of maket trading and liquidity.
Trillions of dollars of value were wiped off the balance sheets of the world’s investors over the next few weeks as forced selling forced prices lower and lower. Adding to the selling pressure, many hedge funds were simultaneously raising cash for redemption demands of investors also squeezed by margin calls by their creditors.
I’m sure none of this was intentional (wink, wink). I’m sure there was no coordination among the prime brokers (nudge, nudge). I’m sure it would never occur to anyone in the Wall Street prime brokerage banks that manipulation of leverage could create profitable trading opportunities (cough, cough).
The result was a collapse in global prices for equities, debt and commodities. FIRE SALE! Everything must go!
As the margin calls got met, the dollar strengthened. It strengthened hugely against the pound. From $2 to the pound earlier this year, Sterling has slid to below $1.50. This is likely because there are such a lot of hedge funds and private equity funds here in London, all struggling to meet their margin calls in New York.
At the same time, we observed a huge expansion in the monetary base as the Fed doubled its balance sheet and Paulson doled out taxpayer largesse to Wall Street. The banks began to accumulate massive reserves and Treasury yields crashed lower, especially at the short end. Treasuries gained value as the prime brokers parked the incoming margin cash in the safest, most liquid asset – the primary collateral for all interbank obligations too. These reserves and Treasuries are just sitting in the Fed and not contributing one iota to the stimulation of the economy.
All of this is interesting recent history. Now what happens when some of these trends reverse?
What happens to the global markets when the deleveraging stops? What happens when there are no more global margin calls on the surviving hedge funds? Will anyone want to buy dollars when they don’t need them to repay dollar debt?
Will there still be inflows to US Treasuries when few need a place to park cash for short term liquidity? What will prop up demand for the Treasuries then?
What happens when banks begin to use reserves to lend or speculate in the now crashed assets available globally at fire sale prices?
With most of the growth still projected to occur outside the USA, will some of those Treasuries be sold to take advantage of the many equity investment deals on offer? How will that affect the dollar?
We are observing huge swings in asset markets. We are observing huge swings in foreign exchange markets.
I’m not going to make any recommendations, but I predict we haven’t seen the end of volatility. The rapid rise of the dollar, the massive demand for Treasuries, are hugely convenient for the US Treasury as it finances the expansion of the Fed balance sheet and the giveaways to the corporate welfare queens on Wall Street and elsewhere in the last days of the Bush administration. It seems unlikely, however, that the conditions can be long sustained.
When they reverse, we may see a fair sized bounce in global equity markets, a loosening of credit conditions in global debt markets, a revaluation of commodities, and a revaluation of the mighty dollar. Many will call the bottom and pile back in.
I wonder how long that will last . . ."
Dollar Drops as Fed Commits Up to $800 Billion to Thaw Credit
By Ye Xie
Nov. 25 (Bloomberg) — The dollar fell for a third day versus the euro as the Federal Reserve committed up to $800 billion to thaw credit for homebuyers, consumers and small businesses, reducing demand for the safety of U.S. assets.
“The Fed and the Treasury are trying to put a floor under risk appetite,” said Alan Ruskin, head of international currency strategy in North America at RBS Greenwich Capital Markets Inc. in Greenwich, Connecticut. “The euro-dollar should show upward bias.”
The dollar dropped 0.5 percent to $1.3024 at 9:02 a.m. in New York, from $1.2953 yesterday. The yen advanced 1.4 percent to 96.04 per dollar from 97.34. The yen increased 0.8 percent to 125.09 per euro from 126.08.
The central bank will purchase as much as $600 billion in debt issued or backed by government-chartered housing-finance companies. It will also set up a $200 billion program to support consumer and small-business loans, the Fed said in statements today in Washington.
“It’s not great news for the dollar, which is an anti-risk currency,” said Dustin Reid, a senior currency strategist at ABN Amro Bank NV in Chicago.
The Organization for Economic Cooperation and Development cut its forecast for global growth in 2009. The economy of the organization’s 30 members will contract 0.4 percent next year, after expanding 1.4 percent this year. Earlier this month, it had predicted a 0.3 percent contraction.
Gross domestic product in the U.S. shrank at a 0.5 percent annual rate from July to September, more than the government’s earlier estimate of a 0.3 percent contraction, the Commerce Department said in Washington. The decrease matched the median forecast of 71 economists surveyed by Bloomberg News.
“The world is still in an ugly place and the general macroeconomic picture facing all economies is pretty grim,” said Paul Robinson, a currency strategist in London at Barclays Capital and a former Bank of England economist. “The yen will gather support with slow growth.”
The Conference Board’s consumer confidence index remained at 38 in November, matching the October reading that was the lowest since monthly records began in 1967, a separate Bloomberg survey showed. The report is due at 10 a.m. in New York.
Citigroup has received a U.S. government rescue package that shields the bank from losses on $306 billion of toxic assets and injects $20 billion of capital. President-elect Barack Obama warned yesterday in Chicago that the U.S. may lose “millions of jobs” next year and vowed to push for a stimulus package without specifying the cost. Financial institutions around the world are facing $968 billion in losses on securities tied to home mortgages.
Last Updated: November 25, 2008 09:06 EST