Fed Bailout Worsens Market Panic
Interestingly, this does not appear to reduce market panic. Quite to the contrary, as this move clearly indicates panic at the Fed and that there is a risk of a market meltdown, this have caused sharp sell-offs in global stock markets and a sharp drop of the U.S. dollar against primarily gold, the yen and the Swiss franc, and to a lesser extent also the euro.
As a illustration of the current level of market irrationality and panic, the U.S. dollar has however actually gained in value versus a number of currencies, including the Australian and New Zealand dollar, the U.K. pound and the South Korean won. The move is most dramatic in the case of the won, as it fell today by 3.2%, from 997 to the U.S. dollar to 1,029. It has fallen more than 10% against the U.S. dollar in recent months and more than 20% against the Japanese yen. There is simply no rational justification for why news of deepening problems in the U.S. would cause the U.S. dollar to rise against any currency. While the yen and the Swiss franc was unfairly punished by the carry trade in the past, today many smaller or mid-size currencies such as the won is punished by an irrational fear of anything that market participants have arbitrarily deemed to be "risky". In the mid- to long run that creates profit opportunities in these currencies, but as long as this panic goes on, going into them seem unwise.
Considering the panic in today's move by the Fed, it now seems slmost certain that they will go for at least a 100 basis point Fed funds and discount rate cut tomorrow (or perhaps even today! In these crazy times that can't be ruled out, although it is perhaps not likely) as they know that anything less would disappoint the markets.