U.S. dollar rally may stall at the start of 2009 - Mercedes-Benz Forum

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post #1 of 15 (permalink) Old 12-08-2008, 09:34 AM Thread Starter
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U.S. dollar rally may stall at the start of 2009

U.S. dollar rally may stall at the start of 2009

NEW YORK (Reuters) - The reality of low interest rates and deep economic recession should finally start to catch up with the U.S. dollar in 2009, after risk aversion and de-leveraging helped push the currency to multi-year highs.

The advance -- which has pushed the dollar up almost 20 percent against a basket of six currencies .DXY since July -- is "artificial" and may subside once extreme risk aversion eases and global markets stabilize, analysts said.

"Foundations for the dollar's recent rally have not been solid. The result of repatriation, deleveraging, quantitative easing and a major scarcity of dollars," said Bob Sinche, head of global FX and rate strategy at The Bank of America in New York. "But now we are bound for a correction."

Sinche said euro/dollar may be trading at 1.38 by the end of December and that the dollar may rapidly dip to 1.44 to the euro by the first quarter of 2009 before the pair resumes a "more gradual sell-off."

The European currency was last trading in New York at $1.2804 compared with a record high of $1.6038 touched on July 15. Demand for the greenback rose as the financial crisis deepened and even as the Federal Reserve cut interest rates while the economy slowed.

"The dollar was at the receiving end of leverage flows and also concerns about the euro zone's ability to navigate its first systemic crisis," said Daniel Katzive, director for global foreign exchange at Credit Suisse Securities in New York. "But the U.S. currency is no longer very cheap. Actually, in same pairs, the undervaluation of the dollar has been erased remarkably quickly."

Goldman Sachs' senior investment strategist Abby Joseph Cohen also said on Thursday the U.S. dollar now is about at the level "it should be."

Katzive at Credit Suisse added it may be premature to call the end of de-leveraging and that price action in euro/dollar may be choppy until the end of the year.

However, he said extreme risk aversion is beginning to show signs of easing. And that combined with lower rates and a weak economy, this should start to add pressure on the dollar. The bank forecasts euro/dollar to trade as low as 1.23 in the near term but rebounding to 1.37 in about six months.

In a sign risk may be easing, most currency strategists in a Reuters poll released on Wednesday said they expect volatility in the euro, sterling and yen against the dollar to decrease in the next few weeks.

The poll implied monthly annualized volatility of 14.8 percent for the euro against the dollar in December, down from the 23.6 percent seen in November.

"If the equity markets manage to hold on to some of its gains, with some relaxation in risk aversion, we may see a pullback in euro/dollar," said Tom Fitzpatrick, chief technical analyst at Citigroup in New York. "Some weakening in the dollar is not inconceivable."

RATE CONVERGENCE

Still, for many analysts, the outlook for the dollar in the next couple of months will depend greatly on the impact that lower benchmark interest rates across the globe will have on multiple currencies.

Most major central banks have been cutting benchmark rates, aggressively trying to revive local financial markets and economies since the global financial crisis deepened in September.

This week alone, the European Central Bank, the Bank of England, Sweden's Riksbank and the Reserve Bank of New Zealand all matched or exceeded easing expectations at rate-setting meetings.

Earlier on Thursday the ECB cut interest rates by 75 basis points in its biggest move ever. Its main refinancing rate now stands at 2.50 percent, the lowest in nearly 2-1/2 years, but more than double the U.S. Federal Reserve's benchmark rate at 1 percent.

But while some analysts like Katzive at Credit Suisse expect interest rate differentials to gradually weigh on the dollar in 2009, others argue a correction won't be immediate.

"Global yield differentials are collapsing and it is perhaps just a few months before rates in the eurozone and the UK fall very close to the US rates," said Vassili Serebriakov, a senior currency strategist at Wells Fargo Bank in New York.

"But while rate convergence could remove some of the recent support for the dollar, once financial conditions stabilize and risk appetite returns, the yield attraction of currencies such as the pound and the euro over the dollar is likely to have disappeared," he added.

Wells Fargo forecasts euro/dollar will be trading at 1.26 in six months and at 1.28 in one year.

U.S. dollar rally may stall at the start of 2009 | U.S. | Reuters
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post #2 of 15 (permalink) Old 12-08-2008, 10:14 AM
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Until the US finds something to produce other than debt, this will be the story.

Recall that earlier generations faced down fascism and communism not just with missiles and tanks, but with sturdy alliances and enduring convictions. They understood that our power alone cannot protect us, nor does it entitle us to do as we please. Instead, they knew that our power grows through its prudent use; our security emanates from the justness of our cause, the force of our example, the tempering qualities of humility and restraint.

-President Barack Obama, 1st Inaugural address
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post #3 of 15 (permalink) Old 12-08-2008, 10:28 AM
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Do assholes like this guy help?
Merrill CEO wants $10 million bonus - U.S. business- msnbc.com
Quote:
Merrill CEO wants $10 million bonus
Report: Ailing company’s compensation committee is resisting request
Reuters
updated 12:20 p.m. ET, Mon., Dec. 8, 2008

NEW YORK - Merrill Lynch & Co Chief Executive John Thain has suggested to directors that he get a 2008 bonus of as much as $10 million, but the battered company’s compensation committee is resisting his request, the Wall Street Journal said, citing people familiar with the situation.

The compensation committee has not reached a decision, but is leaning toward denying Thain and other senior executives bonuses for this year, the people told the paper.

Merrill could not be immediately reached for comment.

Shareholders on Friday approved Bank of America Corp’s takeover of Merrill, a deal fraught with risk but one that would create a banking giant with a leading position in almost every major area of the financial system.

Merrill was arguably saved from extinction when it agreed to merge on September 15, an hour before Lehman Brothers Holdings Inc filed for bankruptcy. The fear was that Merrill could be next if shareholders and trading partners fled, as many did at Lehman and the former Bear Stearns Cos.

Thain has said he deserves a bonus because he helped avert what could have been a much larger crisis at the firm, people familiar with his thinking told the WSJ.

Members of Merrill’s compensation committee agree with Thain that the takeover is in shareholders’ best interest, but believe it would be foolish to ignore strong public sentiment against large compensation packages, the paper said, citing people familiar with their thinking.

Committee members are also weighing the fact that other Wall Street firms, including Goldman Sachs Group Inc, which did better than Merrill this year, are not giving out bonuses to top executives, the paper said.

Thain, who became Merrill’s chief executive after losses in mortgage-related investments led to the October 2007 ouster of Stanley O’Neal, has also run NYSE Euronext, after a long career at Goldman.

After the Bank of America-Merrill deal is completed, he will run the merged company’s global banking, securities and wealth management businesses. Thain will not be joining Bank of America’s board.
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post #4 of 15 (permalink) Old 12-08-2008, 11:08 AM
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That one truly disgusts me, I have some elderly friends who were convinced by their M-L hack to invest money into Merril Lynch corporate-crap paper. Their retirement has been just about wiped out. I would not be surprised to see a wave of assasinations of these clowns perpertrated by the shuffle board set.

Recall that earlier generations faced down fascism and communism not just with missiles and tanks, but with sturdy alliances and enduring convictions. They understood that our power alone cannot protect us, nor does it entitle us to do as we please. Instead, they knew that our power grows through its prudent use; our security emanates from the justness of our cause, the force of our example, the tempering qualities of humility and restraint.

-President Barack Obama, 1st Inaugural address
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post #5 of 15 (permalink) Old 12-08-2008, 12:27 PM
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Yes, most probably we will face inflation in the near future.

But you shouldn't be worried, Robert, we will take everybody else with us.

The more the merrier
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post #6 of 15 (permalink) Old 12-08-2008, 07:40 PM
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Once "financial crisis" eases,US$ may well recommence it's depreciation.This will likely be the cheapest way for USA to pay off it's debt (bond) obligations.It's either that OR raise taxes.Manufacturing strength in USA will be improved as dollar declines and it becomes cheaper for other nations to buy US-made goods.Unfortunately,the longer the US dollar stays where it is, the longer US-based manufacturing will suffer.Meanwhile,as US dollar stays high, manufacturing strength/advantage is growing elsewhere.
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post #7 of 15 (permalink) Old 12-08-2008, 08:36 PM
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The when and where of the inflection point is a captivating matter at the present time.

I'm all loaded up for the aftermath, but for now, um, not so much. Arrgh.
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post #8 of 15 (permalink) Old 12-09-2008, 06:05 AM Thread Starter
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Investor fear drives US Treasury yields to near zero

The panic in global financial markets has sparked an unprecedented rush into safe US Treasury securities, driving yields on short-term government notes down to almost zero.

Due to stampeding demand for safe short-term investments, the US Treasury's four-week and three-month bills on Friday yielded an effective rate of 0.01 percent -- down sharply from 1.515 percent and 1.785 percent, respectively, in early September.

Other Treasuries are also showing record low yields. The 10-year bond yield fell as low as 2.505 percent and the 30-year bond yield slid to 3.005 percent at one point on Friday. The six-month bond yielded a mere 0.20 percent.

The low yields reflect a surge in demand for these instruments, seen as the safest in the world during times of turmoil.

"Investors seem to be content to sell stocks and park into the bonds for now," said Greg Michalowski of the financial website FXDD.

Analysts say the fear factor has pushed up demand for Treasuries, since investors are virtually certain the US government will not default.

Other factors include worries about deflation and the overall trend in interest rates, with the Federal Reserve having cut its base lending rate to a historic low of 1.0 percent, and further reductions possible.

But Bob Eisenbeis, analyst at Cumberland Advisors, said the unprecedented low yields are a sign of "dysfunction" in markets.

Eisenbeis said US municipal bonds are paying upwards of 6.0 percent tax-free and corporate bonds even more, but that fears of default and a lack of knowledge about underlying bond quality have led investors to shun these alternatives.

One reason for the surge in demand for Treasuries, said Eisenbeis, is the Federal Reserve's decision to flood financial markets with liquidity including through other central banks.

Many central banks and commercial banks are reluctant to use this cash for traditional lending, and are buying Treasuries to ride out the storm, Eisenbeis added.

A big question for the market is whether the Treasury market has become a bubble that will burst.

Although the low rates allow Washington to borrow money cheaply, Eisenbeis said such a scenario could be perilous for the economy and the dollar.

"When you have this huge flood of liquidity into the marketplace, that can't last forever," he said.

A bursting of this bubble could mean a rush out of Treasuries, forcing the government to pay higher rates on an unprecedented amount of debt.

"We would have huge increases in our costs and people wouldn't want to hold Treasury obligations anymore because of the capital losses," Eisenbeis said.

"You could have a huge switch in interest rates very quickly."

Mike Larson, an analyst at Weiss Research, says the long-term bond market could be "the biggest bubble of all," worse than the dot-com and real estate bubbles.

"Treasury bonds almost never move this far, this fast. And interest rates, which move in the opposite direction of bond prices, almost never fall this far, this fast," Larson said.

Larson said the yield on the 10-year Treasury bond plunged from a mid-October high of 4.08 percent to nearly 2.5 percent this week, "yielding lows not seen since the mid-1950s."

"There are lots of reasons to believe this Treasury rally is unsustainable, and that a day of reckoning is fast approaching," he said.

Sal Guatieri, economist at BMO Capital Markets, acknowledged that "investors are throwing money at Uncle Sam with the same conviction that they bought houses and dot-com stocks in their heydays."

But he argued that if inflation is quashed and investors retain confidence in the US government, the dangers have not yet hit a boiling point.

"While Treasuries may be overpriced, they probably are not yet in a bubble," he said.

Investor fear drives US Treasury yields to near zero
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post #9 of 15 (permalink) Old 12-09-2008, 04:34 PM
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Quote:
Originally Posted by Jakarta Expat View Post
Investor fear drives US Treasury yields to near zero
Midday correction today: yields went NEGATIVE.

Yes, investors are now accepting 99 cents on the dollar for a safe, secure investment (or so they hope).

THAT is significant. To those who thought Bear & I and a couple others were unduly alarmist about the state of our economy, what does this tell you?
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post #10 of 15 (permalink) Old 12-09-2008, 05:20 PM
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It not only says something about the economy,but perhaps even moreso says something very unfortunate about "investor" psychology.
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