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Stocks Plunge, Dollar Surges

by: Grace Cheng October 06, 2008    

Grace Cheng

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Mayhem ensues in the financial markets again today. $700 billion bailout plan signed into law? That’s not reassuring to Main Street any more. Central banks working hard to inject liquidity into the markets? No visible effect. Governments to insure full bank deposits in some European countries? That’s nice, but people are still nervous, so scared. All that’s really making a lasting impact is how the financial crisis seems to be worsening day by day.

BNP Paribas (BNPQY.PK) has agreed to buy Fortis’ units in Belgium and Luxembourg for 14.5 billion euros ($19.8 billion) after a government rescue plan fell apart. Over in Germany, the government put together a 50 billion euro bailout plan for Hypo Real Estate, Germany’s second-biggest commercial property lender - a move that shocked the Europeans and caused the euro to tumble further.

In the stock markets, it’s all dump, dump, dump. The Dow at one point fell more than 500 points Monday in stock trading and is now below the 10,000 level. Nasdaq at one point fell more than 6%. This dramatic panic selling may not result in a pause in trading, as the Dow’s drop on Monday has not exceeded the 1100-point drop in a day, according to NYSE’s guidelines.

No one can tell if that’s considered capitulation, but it’s certainly not pretty.

In the forex markets, the chorus is ‘Buy Buy Buy the US dollar’. The US currency is the undisputed king of all currencies, as it rose sharply against the euro, the battered British pound, the Swiss franc, the Australian dollar and the New Zealand dollar in forex trading. However, the dollar fell against the Japanese yen as investors flee from ‘risky’ stocks and other assets.

If you are still holding onto any carry trades ‘for the long term’, you might want to know that the carry trade is buried far below the ground (along with any little hope you may have) and may not resurrect in the medium term.

The moves in the forex markets today are truly unbelievable. The biggest losers are namely the high-yielding currencies like GBP, AUD and NZD, with the British pound suffering the most. GBP/JPY plunged 1200 pips (that’s eye-popping, and I believe is the largest 1-day drop in history); GBP/USD fell nearly 400 pips to below 1.7400. The normally tame AUD/JPY fell more than 1000 pips and NZD/JPY tumbled more than 700 pips.

In a nutshell, the US dollar is in high demand now, despite talk that the Fed may cut interest rates by surprise sometime this week. In addition to the USD, the Japanese yen is another big winner in forex as traders ride on the broad unwinding of carry trades.

My advice to currency traders: Make only day trades and don’t fight the sentiment.

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This article has 14 comments:

  •  
    Oct 06 01:06 PM
    fed is printing more paper and putting into financial system causing a temporary fix to the problem. However the dollar long term weakens because of this and will pull back to lows.
    Reply
  •  
    Oct 06 01:17 PM
    It is very interesting my the US dollar and the JY Yen are experiencing such strong moves... we have been speaking about this on myinvestorsplace.com...

    The idea is not to predict...but rather react... why in your opinion is the US dollar strengthening... the best of the worst???
    Reply
  •  
    Oct 06 01:30 PM
    US dollar touched highs for this retaracement today. Sell USD for 65 target in DX.

    Disclosure: Short USDJPY and EURJPY. Short DX.
    Reply
  •  
    Oct 06 01:43 PM
    I find it interesting that the New York Times had the you know what to print a story to the effect that the American consumer is digging a whole for the economy. I think the New York Times has it wrong. It was institutions like the New York Times and their pals on Madison Avenue that created bubble after bubble in our economy that are the blame. Sure... All of those homes are worth that much, just like my Pet Rock. Pull out that credit card and BUY, BUY, BUY just because the New York Times, ABC, NBC & CBS tells you to. Fools.

    Here is an open letter to Bush and Paulson. Please read the following from Franklin Delano Roosevelt's First Inaugural Address. You may wish to not that you two, along with Congress, fell into the same trap that caused the Great Depression. Fools and more fools... Ship of fools...

    "True, they have tried. But their efforts have been cast in the pattern of an outworn tradition. Faced by failure of credit, they have proposed only the lending of more money. Stripped of the lure of profit by which to induce our people to follow their false leadership, they have resorted to exhortations, pleading tearfully for restored confidence. They only know the rules of a generation of self-seekers. They have no vision, and when there is no vision the people perish."

    Yep, people are already perishing due to suicides, etc., etc., etc.

    Way to go! History repeats itself.
    Reply
  •  
    Oct 06 01:44 PM
    The should of been "hole" for the American economy.
    Reply
  •  
    Oct 06 02:04 PM
    A vicious deflationary cycle is about to ensue and the US dollar is one of the few relatively safe areas (thanks to treasuries). Still be are about to be slammed as follows: Banks worldwide, stung by $588 billion in write-downs related to toxic assets -- especially mortgage-related securities -- will further reduce the flow of credit, strangling growth. That will push house prices lower, forcing additional losses and making banks even more reluctant to lend. As the credit crisis worsens, businesses will find it almost impossible to raise prices. They will then be forced to close or start laying off employees, which will in turn reduce consumer demand and thus create a vicious downward economic spiral. See more commentary at : .www.savingtoinvest.com...
    Reply
  •  
    Oct 06 02:17 PM
    Why not the dollar? Relatively speaking it is the safe place to be, look at the picnic the EU put on over the weekend, not inspiring.

    But the Fed will not lower FFunds simply because there is dollar strength. The know that they have only 200 bp to their game. It is time to sit still and watch. Sentiment will shift shortly and it may be nothing will be needed until next yr, 2009
    Reply
  •  
    Oct 06 02:22 PM
    YEN is the king. and it aint due to the yen itself but due to further unwinding of carry positions. ah, there is some foreign assets sales and repatriation back to the USA which creates further squeeze in times of very low liquidity.
    Reply
  •  
    Oct 06 02:29 PM
    we are entering a chaotic period whereby all US partners try desperately to refloat the dollar just like the US struggled from 1920-1933 to keep the pound as the global trade currency power, they used every trick in the book and they all failed. Selling RMB against the YEN and the Dollar will drive China to win the trade game
    Reply
  •  
    Oct 06 03:06 PM
    FYI...

    Here are the "vote switchers" who decided a little bit of pork was the best thing for our country. Maybe they will reconsider the bailout plan since we'll need money to help Main Street.

    Republicans, No to Yes (25)

    Arizona _ John Shadegg.

    Florida _ Vern Buchanan, Ileana Ros-Lehtinen.

    Illinois _ Judy Biggert

    Louisiana _ Rodney Alexander, Charles Boustany.

    Michigan _ Joe Knollenberg, Peter Hoekstra.

    Minnesota _ Jim Ramstad.

    North Carolina _ Howard Coble, Sue Myrick.

    Nebraska _ Lee Terry.

    New Jersey _ Rodney Frelinghuysen.

    New York _ Randy Kuhl.

    Ohio _ Jean Schmidt, Pat Tiberi.

    Oklahoma _ Mary Fallin, John Sullivan.

    Pennsylvania _ Charles Dent, Jim Gerlach, Bill Shuster.

    South Carolina _ Gresham Barrett.

    Tennessee _ Zach Wamp.

    Texas _ Mike Conaway, Mac Thornberry.

    ___

    Republican Jerry Weller of Illinois was absent Monday. He voted yes on Friday.

    ___

    Democrats No to Yes (33)

    Hawaii _ Neil Abercrombie, Mazie Hirono.

    California _ Joe Baca, Barbara Lee, Adam Schiff, Hilda Solis, Mike Thompson, Diane Watson, Lynn Woolsey.

    Nevada _ Shelley Berkely.

    Iowa _ Bruce Braley.

    Indiana _ Andre Carson.

    Missouri _ Emanuel Cleaver.

    Texas _ Henry Cueller, Al Green, Sheila Jackson Lee, Solomon Ortiz.

    Maryland _ Elijah Cummings, Donna Edwards.

    Arizona _ Gabrielle Giffords, Harry Mitchell, Ed Pastor.

    Illinois _ Jesse Jackson Jr., Bobby Rush.

    Michigan _ Carolyn Kilpatrick.

    Georgia _ John Lewis, David Scott.

    New Jersey _ Bill Pascrell.

    Ohio _ Betty Sutton.

    Massachusetts _ John Tierney.

    Vermont _ Peter Welch.

    Oregon _ David Wu.

    Kentucky _ John Yarmuth.

    ___

    Democrats Yes to No (1)

    Washington _ Jim McDermott.
    Reply
  •  
    Oct 06 04:19 PM
    horray for jim mc dermott.

    "It was institutions like the New York Times and their pals on Madison Avenue that created bubble after bubble in our economy that are the blame."

    the NYT was the cause of our economic bubbles? where does that come from? how many people read the new york times? i think you're forgetting about the fed, the congress and george bush himself.

    let's see..what was the name of that guy who told us to go shopping in the aftermath of 9/11?
    Reply
  •  
    Oct 06 05:20 PM
    The bailout is a total SCAM. They told us how urgent it was that they get the bill passed within days. And the day after passage, Paulson comes out and says they won't actually begin buying debt for about a month. Funny...that brings us right around the election.

    How many times will they get away with this BS?!?

    It's time for a damn revolution!!
    Reply
  •  
    Oct 07 08:48 AM
    Dollar Surges, Asian currencies drop, Asians have lots of Dollars, need to strengthen currencies, Sell Dollars.

    Dollar reserves are useless if your country's currency devalues. All together now...BUY Gold.
    Reply
  •  
    Oct 07 08:45 PM
    So much for the great prognosticators of the Western world.

    When the center wont hold, the rest of the world flies apart even faster.
    Reply
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