Wednesday, May 10, 2006

 

US Dollar Falls On Fed Move

Lots of trading news in the wake of the FOMC meeting. "The dollar fell to a one-year low against the euro after the Federal Reserve lifted its benchmark interest rate by a quarter-percentage point and said additional increases will depend on the outlook for the economy. Further rate boosts 'will depend importantly' on the economic outlook, the Fed said."

"The dollar stayed lower after the Treasury Department in a report on currency practices of U.S. trading partners refrained from naming China as a manipulator of exchange rates."

"'The dollar is going to continue to sell off,' said Firas Askari, head currency trader at BMO Nesbitt Burns in Toronto. The chance of a June rate increase, given the current economic outlook, is 'at most 50 percent; any dollar rally is going to be sold.'"

"The Fed began raising rates in mid-2004 when the benchmark was at 1 percent. The European Central Bank has lifted borrowing costs twice since December to 2.5 percent and the Bank of Japan has kept rates near zero percent since March 2001. Traders are betting that both the Bank of Japan and the ECB will lift rates this year."

"The Canadian dollar edged higher against the U.S. dollar on Wednesday, as the flight from the greenback to overseas currencies continued. The Canadian currency finished at C$1.0995 to the U.S. dollar, or 90.95 U.S. cents, up from C$1.1005 to the U.S. dollar, or 90.87 U.S. cents at Tuesday's close."

"Stronger crude oil and gold prices likely helped support the Canadian dollar, while a renewed focus on potential foreign bids for Canadian resource companies has also been cited as a boost for the currency. One analyst said the Canadian dollar's gains were likely limited by a reluctance among traders to push the currency to the point at which the Bank of Canada may decide to not raise rates on the May 24 decision date."

"The price of gold rose to a fresh 25-year high Wednesday as investors sought a safe haven amid a weakening U.S. dollar and worries over the West's confrontation with Iran. The June gold contract rose as high as $707.80 an ounce in electronic trading after the close of the New York Mercantile Exchange."

"John Meyer at Numis Securities attributed the latest gains for gold to economists in China recommending the country's central bank holds more gold. China Gold News suggested that the country quadruple its gold reserves to better balance its foreign exchange reserves, which are now overwhelmingly held in U.S. dollars, mostly Treasuries."

"Foreign investors are unlikely to shift aggressively away from U.S. Treasury debt, and if they did other investors would likely be drawn to Treasurys 'at only slightly higher yields,' a top Treasury official said Tuesday. 'On balance, I would not rule out the possibility that a very substantial portfolio shift away from Treasurys by foreign investors could put some upward pressure on yields, but I believe the effects would most likely be modest and temporary,' Treasury Undersecretary for Domestic Finance Randal Quarles said."

"Quarles said his many conversations with market players indicate that, with the yield curve flat and risk spreads narrow, fixed-income investors have been searching for higher risk-adjusted returns, or 'alpha' in financial jargon."

"'In this sort of environment, I suspect that even a small drop in Treasury prices occasioned by a hypothetical fall-off in foreign demands would be enough to spur legions of alpha-hunters eager to acquire Treasurys at only slightly higher yields,' he said."

Comments:
IMO Quarles is talking nonsense and he knows it. After all, the US$ has already fallen enough in 2006 to wipe out an entire year of interest earnings, while gold is up 40% since November 2005!

This latest credit bubble carries with it the risk of producing a major run on the greenback, should the Fed not protect it.
 
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