Thursday, March 25, 2010

Hubba Hubba - US Dollar Breaks Out

Yesterday was one interesting day outside of equity markets...

It is quite fascinating to see poor economic data - especially of the housing kind (yesterday's February new home sales were the worst on record, despite the US government bribing people to buy homes and near record low mortgage rates) - and European distress completely ignored by market players.  Investors look to be under the belief that "where there is a will, there is a bailout" but seem to be ignoring this is simply inning 1 in a series of sovereign debt issues.  Yesterday, Fitch downgraded Portugal's debt (the P in PIGS) [Mar 9, 2010: Portugal Tries to Front Run Bond Vigilantes], and EU members continue to squabble on the best way to bail out Greece.  "To IMF or not to IMF, that is the question!"
  • The US dollar climbed Wednesday to the highest level in more than 10 months against the euro on mounting speculation the EU would ask the IMF to help bail out debt-ridden Greece in a sign of European weakness.
  • A French government source said: "There are different opinions on the degree to which the IMF would participate in an aid scheme.  "There are some countries that want no IMF at all, some that would accept technical IMF assistance, some that are ready for a certain amount of IMF financing and others that want the Fund to be the only financial provider."
  • Analyst at British bank RBS added: "The involvement of the IMF is a negative on the European solidarity front... because it challenges the idea that the euro area can sort its problems out on its own."
  • The Fitch ratings agency meanwhile lowered Portugal's long-term debt rating by one notch and gave it a negative outlook, warning that a severe strain on public finances had reduced the eurozone country's creditworthiness.
  • "The last time that we recall the greenback making such broad-based gains in the market was at the height of the Lehman Crisis, where extreme risk aversion prompted capital flight into the safe haven US dollar," he said.
So with all this mess, the US dollar is winning the "least ugly" (for now) award.  Remember, this is going to be a chronological crisis - and the US stands as the world's reserve currency; hence is at the very end of this huge daisy chain.  So even as the US spends like a drunken sailor, it is the only country in the world that can get away with it due to being the largest and most liquid currency - and bond market.  And perceptions will take a long time to change.  The great irony is the divergence in the bond market and the currency market yesterday - the US dollar surged as a quite bad 5 year auction happened.  Which might be the first signal of investors reluctance to fund the non stop debt explosion in the US.  (or if you live on a grassy knoll, it could be our chief enabler China stepping back from the table to show the US what it could do ... payback for Google?)

Either way, Miss Congeniality in the Ugly Currency Contest broke out to 10 month highs:

Made all the more hilarious by the fact that the US is already ahead of Portgual into the race to "the next Greece" [Feb 5, 2010: Sovereign Risk Chart - Where Would the US Fit in, on Europe's Scale?] - thankfully we have a printing press to make all our problems go away.  Not so fortunate for such 'easy fixes' in Portugal, Greece, Spain et al.

[Mar 16, 2010: US, UK Move Closer to Losing AAA Rating's Moody's Says]

Long Powershares DB US Dollar Bullish ETF in fund; no personal position

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