Friday, October 03, 2008

Why The Dollar Rally Has Started Again

As you may have noticed the dollar rally has started again. The spin of "mainstream" financial journalists is that this is because of the problems of European banks revealed this week. But while that may explain a small part of the rally against the euro and the pound, it doesn't come near to explaining it all, especially as the economic news from America have been getting progressively worse too (see for example the previous post). And it really doesn't explain any part of the rise against other currencies.

In order to find the truth we must go to the place where no financial journalist will go, namely statistics over central bank behavior hidden in the release over the Fed balance sheet (this release BTW contained a lot of other extraordinary numbers which I will return to later today or tomorrow). After having slowed their purchases (something which correlated with the interruption in the dollar rally) foreign central banks suddenly bought an unprecedented $44 billion of Treasury and Agency bonds in a week. And that is a lot. That's roughly equivalent to 3 times the trade deficit and would if sustained for a year mean $2.3 trillion in purchases. So what we have here is a very dubious (to say the least) racket where the U.S. government is borrowing huge sums from central bank to prop up failed U.S. financial institutions.

Of course, the "mainstream" financial media won't reveal that to you. Which is why you are lucky to be reading this blog.


Anonymous Anonymous said...

Good thinking!

Also "The Trend" is up for the dollar against all currencies exept against the Japanese Yen.

USD will most likely rise for another six months.

Göran, Sweden

5:00 PM  
Anonymous Jon Robinson said...

Lucky indeed. I read this morning in the Pfennig that it could also be due to the fact that the European banks need capital reserved in US dollars because of their toxic US mortgage bonds. They usually use LIBOR for this funding, but since LIBOR rates are high, they are using the euro/dollar swap market instead, trading Euros for Dollars. What do you think of this idea?

5:09 PM  
Blogger Celal Birader said...

Hello Stefan,

Off topic to this post, but can i ask you a question please ?

It seems to me that banks with the most toxic assets on their balance sheet as a proportion of their capital stand to benefit disproportionately more from the Paulson Plan.

I was also wondering if those banks who did not take big write downs on their bad loans but hid them until now will also benefit more from the Paulson Plan compared to those banks who have bravely taken big write-downs.

What do you think ?

9:12 PM  
Anonymous James Parth said...

Excellent analysis as always, Stefan. We are lucky indeed!

9:47 PM  
Blogger stefankarlsson said...

Jon: That could be a contributing factor too. Do you have some link that provide more info on this?

Celal: Yes, you are indeed right. The banks and other financial institutions that have screwed up the most will clearly be the ones that benefit the most from the plan.

10:57 PM  
Anonymous ismailov said...


A couple or so months ago, you expressed the view that both yen and swissie should gain against the dollar in the short- and long-term. so far that has been proven correct as far as yen is concerned but swissie's performance has been disappointing. what is your take on this?

also, what do you think about the sing dollar? it has been holding up much better than swissie against the greenback lately, and both UBS and DB (two top FX houses) are still seeing SGD/USD appreciate in 3-12 month term, although DB did put out a research note this morning suggesting that sing dollar could possibly fall as low as 1.70 in the event of a property bust in singapore.


1:31 AM  
Blogger stefankarlsson said...

Ismailov, the weakness of the Swiss franc relative to the yen is most likely related to first of all the large losses that Swiss banks have suffered on their investments in the U.S. mortgage market and secondly to the weakness of the euro. As most of Switzerland's trade is with the euro area, the Swiss franc has been dragged down by the euro weakness.

As for the Singapore dollar, I don't think it will rise against the US dollar until the general US dollar rally ends.

8:02 AM  
Anonymous Jon Robinson said...


Here is the link to the euro/dollar story I mentioned above:

It is anecdotal, but I'm sure Chuck Butler would give you more info if you asked.

7:29 PM  

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