USD 02 (Oct 09 - Sep 10)

[winston]

Every "expert" is saying that there would be a short squeeze on the USD.

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The Scariest Thing on Wall Street By Jeff Clark
November 3, 2009

While ghouls, ghosts, and goblins were gearing up to haunt neighborhoods across America, something else was spooking Wall Street last Friday. It was the threat of a rising dollar and the potential end of the dollar "carry trade."

The ability to short dollars at virtually zero cost and then use the proceeds to buy other assets – like stocks, bonds, gold, and oil – has been a winning trade since the dollar peaked and the stock market bottomed back in March. But now that trade is getting a little long in the tooth and the markets are getting nervous. With good reason...

You see, never before has the dollar been so despised as a currency. It seems as though everyone is riding the "dollar is doomed" bandwagon. And this rampant dollar pessimism is occurring at a time when everyone is falling in love with stocks and commodities.

So we have a beaten-down currency being used to prop up other assets, which have already inflated considerably in just a few months. It's the exact opposite of what we had in March, when everyone was selling assets at rock bottom prices and rushing toward the safety of the U.S. dollar.

Have economic conditions really changed so much?

Things have improved somewhat. We are no longer on the brink of a financial meltdown, and there are signs of modest growth in the U.S. economy.

But income-tax receipts are still declining, foreclosures are still on the rise, banks still haven't written down the value of bad loans, and the consumer is still not spending. In other words, we still don't have the economic foundation to support rapidly rising asset prices.

The gains of the past several months are principally the result of a falling dollar causing asset price inflation. Traders who have been short the dollar and long riskier assets have profited on both sides as the carry trade bungee cord has stretched far beyond its normal limits.

What happens when the bungee cord snaps back? What happens when the carry trade begins to unwind?

If you've ever been on the wrong side of a short squeeze, then you know the answer. When heavily shorted stocks stop falling, traders step in to cover their positions. The ensuing rallies can be spectacular.

Consider the case of Fannie Mae (FNM). FNM is a worthless company, and the stock really has no equity value behind it. But FNM rallied more than 140% in just four days back in August when short sellers panicked and rushed to cover their shares.

Imagine that those traders used FNM short-sale proceeds to buy other stocks. And then they had to sell those other stocks in order to buy back FNM shares.

Not only would they have gotten crushed when trying to cover their short FNM positions. But they'd also suffer as their other stocks cascaded lower amidst a flurry of sell orders.

That is the risk of an unwinding carry trade. As soon as there's a sustained uptick in the dollar, traders will need to sell their other assets in order to buy back their short dollar positions.

Given the overwhelming short interest in the dollar, a small rally in the greenback could lead to a truly frightening correction in stocks.

http://www.growthstockwire.com/archive/ ... nov_03.asp

[millionairemind]

IMF Says Dollar Funding ‘Carry Trade,’ May Be Still Overvalued
By John Fraher and Shobhana Chandra

Nov. 8 (Bloomberg) -- The International Monetary Fund said traders are probably using the dollar to fund “carry trades” around the world and the currency may still be overvalued even after its slide this year.

“There are indications that the U.S. dollar is now serving as the funding currency for carry trades,” the IMF said in a report published yesterday. “These trades may be contributing to upward pressure on the euro and some emerging-economy currencies.” While the dollar “has moved closer to medium-run equilibrium,” it is still “on the strong side.”

With investors able to borrow at near-zero interest rates in the U.S., some economists are concerned that markets may become distorted as traders plow those funds into riskier assets. Nouriel Roubini, the economist who forecast the financial crisis in 2006, said Nov. 4 that investors are milking the “mother of all carry trades.”

“U.S. interest rates look to remain near zero through the first half of 2010 at the very least, which provides traders plenty of time to continue with carry trades,” said Boris Schlossberg, director of currency research at the online currency trader GFT Forex in New York. “Labor-market conditions are still very challenging in the U.S., and the rest of the world is improving faster. The dollar remains the weakest link.”

Dollar’s Slide

The dollar has dropped about 13 percent against a basket of currencies from its major trading partners in the past seven months. Meanwhile, the MSCI All-Countries World Index of global equities has gained about two-thirds since March and sugar has soared 90 percent this year.

U.S. Federal Reserve policymakers, at the end of a two-day policy meeting on Nov. 4, reiterated their intention to keep interest rates “exceptionally low” for “an extended period.”

Speculation that the Fed will keep rates on hold into next year was further fueled by U.S. Labor Department figures on Nov. 6 that showed the nation’s unemployment rate jumped to 10.2 percent in October, exceeding 10 percent for the first time since 1983.

In a carry trade, investors borrow in countries with low interest rates to invest in higher-yielding assets. Benchmark interest rates of 0.1 percent in Japan and as low as zero in the U.S. compare with 7 percent in South Africa and 2.5 percent in New Zealand, making the yen and dollar favored targets for investors seeking to fund carry trades.

Marc Chandler, global head of currency strategy for Brown Brothers Harriman & Co. in New York, said the dollar carry trade is likely to continue in coming months, and he expects the U.S. currency will decline further.

Risk Appetite

“The key wildcard to dollar carry trades is whether people continue to show an appetite for risk,” Chandler said. “That’ll weigh on the dollar.”

The euro’s exchange rate “is on the strong side of its equilibrium,” the Washington-based IMF said.

The fund, which published the report as officials from the Group of 20 nations gathered in St. Andrews, Scotland, also said that China’s yuan is “significantly undervalued.”

The Chinese currency “has depreciated in real effective terms in tandem with the U.S. dollar and remains significantly undervalued from a medium-term perspective,” the IMF said.

China has kept the exchange rate at about 6.83 to the dollar since July 2008, after letting the currency strengthen 21 percent in the previous three years. Appreciation was halted to help sustain exports amid a global recession.

Chinese central bank Governor Zhou Xiaochuan told Bloomberg News on Nov. 6 that “the pressure from the international community to allow yuan appreciation is not that big,” deflecting calls from Europe and Japan to let it rise.

Since President Barack Obama took office this year, “the U.S. hasn’t been as vocal” about the Chinese currency as it was previously, Brown Brothers’ Chandler said.

[kennynah]

continue to borrow USD and short it.... this will simply feed on itself until USD goes to 1USD = 1SGD.... wahahahaha...

[millionairemind]

Talk is cheap.. more action required..

Since the USD carry trade is alive and well, the only way to get USD to rebound strongly is to engineer a crash in the global markets, causing a flight to treasuries, dropping yields and squeezing the shorts

Nov 17, 2009
Fed to ensure strong US$

WASHINGTON - THE Federal Reserve is 'attentive' to the slide in the US dollar and is working to 'help ensure that the dollar is strong and a source of global financial stability,' Fed chairman Ben Bernanke said on Monday.

Mr Bernanke, in a New York speech, said the central bank was closely monitoring exchange rates with the dollar having lost its gains from safe haven flows during the height of the financial crisis.

'We are attentive to the implications of changes in the value of the dollar and will continue to formulate policy to guard against risks to our dual mandate to foster both maximum employment and price stability,' he told the Economic Club of New York.

'Our commitment to our dual objectives, together with the underlying strengths of the US economy, will help ensure that the dollar is strong and a source of global financial stability.'

Mr Bernanke's comments come with the greenback under heavy pressure in foreign exchange markets, raising complaints from around the globe about the weak US currency that could have significant impacts on various economies.

Because of the Fed's near-zero interest rate policy, the dollar is being used by investors for so-called carry trades in which they borrow greenbacks at low rates to invest in higher-yielding assets such as commodities and bonds of other governments. This increases pressure on the dollar. -- AFP

[kennynah]

maybe one day....

1 USD = 1 Viet Dong

but for now...eur/usd at 1.5 seems to be a resistance.... this breaks...the all time low for USD against Eur is ~1.6

[winston]

They can increase interest rates or they they would be forced to increase interest rates..... to save the dollar.

My expectation is that it may happen sooner than expected.

Take it with a pinch of salt. I just saw 2012 so am expecting the end of the world

[kennynah]

heliborne trained commando bernanke said in his speech yesterday about giving the weak dollar focus... he did...but for all of 1 hour...cos, after that, he went for his sumptuous buffet lunch on the state...

[kennynah]

tell you all a secret.... i am so ignorant of the term "USD carry trade", i just pretend i understand and nod in agreement whenever people around me speak of it...

so, i hope someone can educate me ... i shall be grateful

[iam802]

I want to add one more question.

This USD carry trade....when it inverts, does that means SG stocks will plunge?

How about US stocks...will it plunge or will it fly to the sky (very impt. because I have US stocks and no SG stocks) ?

[winston]

tell you all a secret.... i am so ignorant of the term "USD carry trade", i just pretend i understand and nod in agreement whenever people around me speak of it...

Hmmm... USD Carry Trade.

1) Borrow in USD at zero interest and invest in another higher yielding currency eg. AUD ?
Example: Borrow at zero and get 4%

2) USD drops in value against AUD and you end up with some capital gains on the side ?
Example: Another 6% gain

So suddenly, one has made 10% from nothing

And since it's a no brainer, we leveraged it up 50 times