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Archive for December, 2008

Interest Revives in Yen Carry Trade

Dec. 31st 2008

On the basis of a 25% appreciation against the Dollar, 2008 marked the strongest year for the Japanese Yen since 1972, as the credit crisis caused a rapid unwinding of carry trades as investors abandoned risky positions. 2009 may not be as auspicious for the Yen, however, as a bevy of factors coalesces to halt its upward progress. First of all, global credit and forex markets have begun to stabilize over the last few months. The seemingly unending US government bailout has restored confidence in riskier sectors, such as the automotive sector. Coupled with a cut in Japanese interest rates, investors are being lured back into the carry trade. In addition, Japanese economic officials are becoming more vocal about the Yen's rise, which is threatening to send the export-dependent economy into another deep recession. It is therefore conceivable that the Central Bank could intervene on behalf of the Yen, despite the pleas of the G8. Bloomberg News reports:

The last time Japan intervened on its own, it sold a record 20.4 trillion yen ($226 billion) in 2003 and 14.8 trillion yen in the first quarter of 2004, when the yen rose as high as 103.42 per dollar.

Read More: Yen Weakens as Carmaker Loans Revive Confidence in Carry Trades

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Posted by Adam Kritzer | in Japanese Yen | No Comments »

China’s FX Reserves Fall

Dec. 30th 2008

Anyone curious about whether China is intentionally allowing the RMB to depreciate, need look no further than the Central Bank's latest forex reserve figures, which registered a decline for the first time in nearly six years. At the same time, Chinese trade figures indicate that exports fell for the first time in seven years, which limits the government's ability to build up new reserves. As a result of the credit crisis, it's conceivable that the Central Bank will continue to spend down its reserves in order to provide a boost to its faltering economy. US President-elect Obama will have to deal with such forces if he wishes to successfully take on China's currency policy. Otherwise, the RMB currency could appreciate in 2009, bucking its trend over the last few years.

Read More: China's forex reserves fall

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Posted by Adam Kritzer | in Central Banks, Chinese Yuan (RMB) | No Comments »

USD Up in 2009?

Dec. 29th 2008

As 2008 comes to a violent end, forex analysts are releasing their predictions for 2009. Most believe that risk aversion and interest rate discrepancies will cease to weigh on forex markets, especially compared to 2008, when investors unwound carry trades and parked their money in low-yielding (but apparently less risky) US and Japanese securities. Instead, investors will probably begin to focus more on economic fundamentals. With regard to the Dollar, this approach could work either way. On the one hand, it is conceivable that the US will outperform (this could translate into a milder recession) the EU and Japan, since the Fed's interest rate cuts were implemented at such an early stage. On the other hand, the US twin deficits continue to expand, which suggests the possibility of long-term inflation as well as a potential reluctance in foreigners to continue to lend to the US. Marketwatch reports:

To be sure, the dollar's 2009 trajectory depends a lot on what the U.S. and global economies do, and when they do it. The U.S. recovery could begin midyear, or the clouds could linger until the fourth quarter or even longer.

Read More: Dollar faces correction, but could head up in 2009

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Posted by Adam Kritzer | in Investing & Trading, US Dollar | No Comments »

Ruble to Depreciate Gradually

Dec. 26th 2008

The perfect economic storm continues to brew in Russia; the financial crisis is sapping demand for Russian securities, and a decline in the price of oil (as well as other commodities) has turned the balance of trade from surplus to deficit. As a result, Russian banking officials seem resigned to a depreciation in the Ruble, but are understandably averse to a sudden devaluation, which could shock the economy into complete collapse. Nonetheless, in the last week, the currency recorded record drops as the Central Bank took advantage of Dollar weakness to adjust the band in which the Ruble is permitted to fluctuate (read: decline). Given continued weakness in the price of oil, combined with a faltering economy and surging domestic unemployment, investors should continue to expect precipitous drops in the Ruble, as it sinks to a sustainable level. Bloomberg News reports:

Troika Dialog, the nation’s oldest investment bank, and Goldman Sachs Group Inc. predict the ruble will have to weaken by at least 20 percent against the basket to reignite an economy stymied by a 62 percent drop in oil prices since July.

Read More: Ruble Falls Most Against Euro Since 1999 on Double Devaluation

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Posted by Adam Kritzer | in Central Banks, Emerging Currencies | No Comments »

Investors Uncertain about Fed Rate Cut

Dec. 25th 2008

More than a week after America's Federal Reserve Bank slashed its benchmark interest rate to the historic (low) level of .25%, investors are still struggling to assess the implications. The immediate reaction was mostly positive, as Central Banks around the world (namely Hong Kong and Japan) quickly followed suit, and stocks rallied. In other words, investors were buoyed by the belief that Central Banks can and will employ all available financial tools to maintain acceptable liquidity in financial markets and to prevent the economic downturn from turning into a depression. On the other hand, forex traders were understandably dismayed by the growing gap between US and foreign interest rates, as well as the inflationary implications of the Fed's plan to essentially print money and inject it directly into the economy. The Associated Press reports:

"While there was applause for the (Fed) cuts…investors are now standing back and reflecting further on what that means," said…an analyst. "Some nervousness has been expressed in the currency markets. We have seen a weakened dollar, which has probably had an effect on the markets across the board."

Read More: World markets mixed after Fed's historic rate cut

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Posted by Adam Kritzer | in Central Banks, US Dollar | No Comments »

Japan: Intervention Unlikely

Dec. 24th 2008

If ever there was a case for Japanese intervention in forex markets, it is now. The Yen has emerged as the unquestionable victor from the credit crisis, having appreciated against every major currency and notching a 13-year high against the Dollar. Japanese exports have plunged, inducing the country's first monthly trade deficit in almost three decades. Meanwhile, corporate profits are sagging as a result of forex conversion losses, and the unemployment rate could soon set a new record. Notwithstanding comments to the contrary by a high-ranking official, however, the Central bank of Japan is perhaps unlikely to intervene on behalf of the Yen, if only for political reasons. The G7 countries, namely the US, have urged Japan to allow the market to run its course, as it hopes the weaker Yen can help restore some of America's export competitiveness. The Asia Times reports:

Japan will be criticized internationally, especially by the US, the country's strongest ally, if it acts to stem the currency's gain as US automakers are still on the brink of bankruptcy. The stronger yen drives up the price of cars imported to the US.

Read More: Japan to live with yen burden

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Posted by Adam Kritzer | in Central Banks, Japanese Yen | No Comments »

Lower Pound a Mixed Blessing

Dec. 23rd 2008

The British Pound has fallen so sharply in 2008 that parity with the Euro isn't that far-fetched. The problem is that the UK economy now closely mirrors that of the US, minus the perceived "safe haven" aspects. In fact, the UK now has a twin deficits problem of its own, with a trade imbalance that exceeds 4% of GDP and government spending set to rise in response to the credit crisis. Meanwhile, UK interest rates have already been reduced drastically, and could fall all the way to zero, again mirroring the US. The combination of cheap money and higher imports is raising the specter of inflation, and frightening away foreign investors. Under ordinary circumstances, a cheaper Pound could be an effective remedy for recession, but when the entire global economy is reeling, it probably can't accomplish much. The Telegraph reports:

Even though sterling has fallen, exports orders remain weak. Competitive devaluations rarely work. But they have no chance of when the rest of the world is slowing too.

Read More: Weak sterling means the UK will take a pounding

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Posted by Adam Kritzer | in British Pound, Politics & Policy | No Comments »

Fed is Debasing Dollar

Dec. 22nd 2008

Several years ago, Ben Bernanke earned the nickname "Helicopter Ben" by joking that the Fed would drop Dollars from helicopters if the American economic situation ever became desperate enough to warrant it. In hindsight, the bestowers of this nickname could not have been more prescient, as the Federal Reserve Bank has now officially pledged to do everything in its power to stimulate the flow of money, short of literally dropping currency from the sky. Capital markets naturally reacted to this policy prescription with delight, as some of the surplus dollars will certainly be used to bid up and stock and bond prices. Currency markets, on the other hand, were not so complacent, sending the Dollar back down from the depths from which it only recently emerged. In other words, zero-interest rates and a surfeit of dollars hot off the printing press has analysts and forex traders wondering aloud about who will be foolish enough to want to own Dollars in the future. The Wall Street Journal reports:

If the Fed is going to create boatloads of depreciating, non-yielding dollar bills, who will absorb them? Who will finance the Obama administration's looming titanic fiscal deficits? Who will finance America's annual surplus of consumption over production (after 25 more or less continuous years, almost a national trait)?

Read More: Is the Medicine Worse Than the Illness?

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Posted by Adam Kritzer | in Central Banks, US Dollar | No Comments »

Softening Risk Aversion Impacts Forex

Dec. 19th 2008

The last two weeks have proved the old adage, "What goes up must come down." In other words, the year-long Dollar rally has begun to fade, as investors once again embrace economic reality. Previously, Dollar strength could be largely attributed to exit trades out of other currencies, rather than any substantive benefit of investing in the US. Now, risk appetite is slowly recovering, having received a boost from the just-completed government bailout of the US automobile industry. Less concerned about risk/volatility, investors have taken to re-assessing economic fundamentals. In the case of the US, unemployment is rising, the twin deficits continue to expand at a breakneck pace, and the interest rate disparity between the ECB and Fed will remain in place for the near-term. The Wall Street Journal reports:

Whether the dollar will continue to weaken is a matter of debate. Currency strategists caution that the dollar often is weaker toward the end of the year, particularly against the euro, as companies and investors adjust bets.

Read More: Less Panic Puts Pressure on Dollar

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Posted by Adam Kritzer | in Economic Indicators, Japanese Yen, US Dollar | No Comments »

Central Banks Still Prefer Dollars

Dec. 18th 2008

Since its introduction only ten years ago, the Euro has ascended at an incredible pace. Perhaps the best proxy for its respectability is its growing share (currently estimated at 27%) of Central Banks' foreign exchange reserves. Still, most analysts reckon that the Dollar will remain ascendant for the near-term. For one thing, the perception remains that the US is the safest place to invest, and in fact this attitude has been reinforced by the current economic downturn. In addition, there is very limited doubt that the Dollar will be around for a very long time, whereas there are many skeptics who invariably insist that the Euro is on the verge of breaking up. In short, as the global economy rebalances itself, reserve accumulation will slow generally, and diversification into the Euro will slow specifically. Marketwatch reports:

In view of the value already tied up in holdings of U.S. government paper, it would take a decisive — and probably foolhardy — shift for the world's largest reserve holders in Asia or Latin America to transfer significant holdings of present reserves out of the dollar and into the euro.

Read More: Reserve shifts into the euro will slow

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Posted by Adam Kritzer | in Central Banks, Euro, Politics & Policy | No Comments »

Emerging Markets Poised for Recovery?

Dec. 17th 2008

In a recent interview, three emerging market fund managers aired a common view: the asset class which comprises emerging markets represents a solid investment. Their reasoning is that the tremendous declines wrought in emerging market equities and currencies over the last six months were caused primarily by technical factors, rather than a substantive change in the long-term economic picture. In other words, this drop was effected by foreign investors that withdrew money en masse from emerging markets in order to meet fund redemptions and repay loans denominated in Dollars. At the same time, economic analysis, as well as common sense, dictate that an increasing portion of future global growth will be realized in the developing world. Many such countries have invested wisely in infrastructure and built up sizable foreign exchange reserves. Consequently, they are well-positioned to survive the current downturn intact. Accordingly, once investors "come to their senses" and recover their collective appetite for riskier investments, it probably won't be long before emerging market assets and currencies are bid up to pre-crisis levels. Forbes reports:

"Current valuation of emerging markets is the lowest it has been since I began investing in this asset class in 1988. Based on trailing 12-month earnings, emerging markets is trading at a price/earnings ratio of only 7.7x, and a price/book of 1.3x (with return on equity at 17%)," [observed one analyst].

Read More: Emerging Markets: What To Buy

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Central Europe Continues to Chase Euro

Dec. 16th 2008

While the credit crisis has led some skeptics to presage the end of the European common currency, some in Central Europe are still eager to join it. However, their cause may have been jeopardized by the credit crisis. The economies of Poland, Hungary, and Czech Republic-the three most qualified candidates to join the Euro-have been plunged into turmoil. Capital flight has wrought precipitous declines in all of their respective currencies. In light of record volatility and continued bearish sentiment, some analysts have argued that the Euro represents the key to their salvation. The only problem is that the credit crisis is scrambling their ability to meet the necessary pre-requisites to membership. Bond yields trade at an unacceptable spread to those of Euro members, inflation has yet to be tamed, budgets have shifted from surplus to deficit, and reserves are shrinking faster than they can be replenished. And yet, there are those who remain optimistic. Bloomberg News reports:

"In Poland and Hungary the crisis has increased the public support for euro adoption and I'm keeping my bet that both countries will enter ERM-2 in the second half of 2009. The more euro-skeptic Czechs may do it a year later," said [one analyst]. 

Read More: Euro Dreams Fade for Zloty, Forint, Koruna on Slump

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Posted by Adam Kritzer | in Emerging Currencies, Euro | No Comments »

Canadian Dollar Hurt by Economy, Politics

Dec. 15th 2008

Having fallen well below parity with the USD, the Canadian Loonie is now being attacked on two fronts. First, there is the deteriorating economic situation. Prices for virtually all commodities, namely oil, have declined significantly this year, dealing a harsh blow to the natural resource-dependent Canadian economy. In addition, its largest trade partner, the US, is suffering from economic woes of its own and is in no position to support the Canadian export sector. The result is surging unemployment and the most precipitous decline in factory production in 25 years. The most optimistic economists are forecasting GDP growth of 0.0% in 2009. The second prong of the attack against the Loonie is being waged unintentionally by the country's Prime Minister, who recently suspended Parliament in order to avoid a no-confidence vote in his leadership. In short, bulls for the Canadian Dollar (not to mention democracy) don't have much to be excited about these days. Bloomberg News reports:

"The global backdrop is bearish for the Canadian dollar and domestic numbers are merely piling on,"said a senior currency strategist. "No one is looking for reasons to buy the Canadian dollar right now. They want reasons to sell."

Read More: Canada's Dollar Posts Weekly Decline on Jobs, Politics, Oil

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Investors Uncertain about RMB

Dec. 11th 2008

Only a few weeks ago, investors had made significant bets that China would reverse its official policy of RMB appreciation. Futures prices indicated that investors collectively expected the currency to depreciate over 7% against the Dollar over the next year, as part of a comprehensive Chinese policy to boost the faltering economy. Since then, however, the RMB recorded its biggest one-day rise since the currency peg was abandoned three years ago, and investors subsequently scaled back their bets.

While it's unclear what caused the sudden change in sentiment, there are a few factors which probably contributed. First is Treasury Secretary Henry Paulson's recent visit to China, in which he encouraged China to continue to permit the the Yuan to appreciate. In addition, high-ranking Chinese economic policy-makers have indicated that market forces will increasingly determine the valuation of the Yuan. Finally, there is the recent election of Barack Obama, a long-standing critic of what he believes to be the undervalued RMB. Bloomberg News reports:

"Any attempt to devalue the currency is likely to be met with considerable opposition from China’s trading partners." The new U.S. administration under President-elect Barack Obama "will be less tolerant of the 'crawling peg' appreciation policy," said one analyst.

Read More: Yuan Forwards Advance Most Since Peg as China Seeks Stability

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Emerging Markets Shed FX Reserves

Dec. 9th 2008

According to the most recent monthly data, the foreign exchange reserves of most developing countries are disappearing faster than they can be replenished. As a result of the global credit crisis, central banks have taken to deploying vast sums of capital towards the dual ends of stimulating their economies and propping up their currencies. The latter can be especially expensive, as countries like Ukraine and South Korea can attest. Both countries have spent 20% of their respective reserves to halt the decline of their currencies, and both abandoned such a strategy after accepting its futility. Ironically, there seems to be a direct correlation between dwindling forex reserves and a depreciating currency, as investor nervousness and currency devaluation reinforce each other. There is one bright spot in this quagmirem, however. The Guardian reports:

China says its reserves are continuing to rise, with the chief economist at the National Bureau of Statistics telling Reuters they would exceed $2 trillion by the end of the year. Beijing [will] not resort to “panic selling” of reserves, instead maintaining a “prudent and responsible” stance.

Read More: Emerging reserves haemorrhage as currencies fall

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Posted by Adam Kritzer | in Central Banks, Emerging Currencies | No Comments »

AUD Continues to Dive

Dec. 8th 2008

On the basis of technical factors, the Australian Dollar had halted its precipitous decline against most major currencies. As a result of an unbelievable 100 basis point interest rate cut, however, the currency has resumed its fall. That the rally was short-lived is not a mystery. The yield advantage enjoyed by Australia over the last few years has almost completely evaporated. Combined with lackluster Australian equity performance and tanking commodity prices, foreign investors have little reason to maintain capital in Australian holdings. On the plus side, the rate cut showed investors how serious Australian economic policy-makers are in dealing with the credit crisis. Unfortunately, diligence doesn't always translate into efficacy.

Read More: Dollar back under pressure

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Posted by Adam Kritzer | in Australian Dollar | No Comments »

Will China Fund US Deficit?

Dec. 8th 2008

When all is said and done, the US government will have injected trillions of dollars into the economy, in the form of bailouts, guarantees, economic stimuli, etc. Whether it will have the desired effect is debatable. The question that no one seems to be asking is, "How is the government going to finance such exorbitant spending?" It appears that China, which has become of of the largest holders of US government debt, will continue to participate- not necessarily because it wants to, but because it doesn't have a choice. China's economy remains heavily reliant on the export sector to drive growth. Because its exchange rate regime does notpermit the RMB to fluctuate freely, the proceeds from the consequent trade surplus must be invested abroad, rather than domestically. For both symbolic and economic reasons, it seems the bulk of the surplus will continue to be invested in the US, probably in safer assets like US Treasury Securities. This is certainly good news for deficit hawks and Dollar bulls. The Wall Street Journal reports:

Even if China wanted to invest outside the U.S., it couldn't. If China recycled its foreign currency into, for instance, the European Union or Japan, it would effectively force those trading partners to run large trade deficits with China, which neither can absorb.

Read More: China Will Keep Buying U.S. Government Debt

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Posted by Adam Kritzer | in Central Banks, Chinese Yuan (RMB), US Dollar | No Comments »

Russian Ruble Declines with Price of Oil

Dec. 6th 2008

Having already fallen 12% in 2008, the Russian Ruble is well on is way to fulfilling analysts' predictions that it will fall 30% before stabilizing against the US Dollar. While the credit crisis has not been kind to Russia, the Ruble is suffering more from a collapse in the price of oil, which recently slipped below $50 a barrel. For reference, the government needs the price of oil to stay above $70 in order to balance its budget. Now, the country's current account surplus is eroding almost as quickly as its foreign exchange reserves, which it is deploying in a vain effort to forestall the decline in the Ruble. The response of the Central Bank has been to widen the band within which the currency is permitted to fluctuate; in practice, this is tantamount to defeat, and is sure to trigger a further decline. Bloomberg News reports:

"The central bank is letting it fall because of oil, reserves depletion, all of that," said an emerging-markets currency strategist. "We can probably expect to see more of this."

Read More: Ruble Falls on Speculation Central Bank Scaling Back Defense

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Posted by Adam Kritzer | in Central Banks, Emerging Currencies | No Comments »

Japan Stays out of Forex

Dec. 4th 2008

Officially, Japan has not intervened in forex markets since 2004, when it spent the equivalent of $300 Billion to hold down the value of the Yen. That impressive streak could soon come to and end, however, as the Yen continues to surge on the unwinding of the carry trade. The performance of the Yen- which recently touched a 13-year high- is particularly impressive since it comes at a time when virtually every other currency has collapsed relative to the US Dollar. Now, analysts have once again taken to pouring over monthly data on Japan’s Central Banking activities, in order to confirm that it is keeping its finger off of the trigger. Given that the Yen’s appreciation has already prompted several high-level meetings among global economic and political leaders, however, it is probably only a matter of time before Japan ends its multi-year abstinence from forex. Reuters reports:

Japanese Finance Minister said earlier this month that the authorities must be ready to deal with big swings in markets as they are undesirable. His comments pushed the yen lower against the dollar as market players were wary of intervention.

Read More: Japan did not intervene in currency market in Nov

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When will the Dollar Rally End?

Dec. 3rd 2008

At this point, it should be clear to everyone that the ongoing Dollar Rally is due more to technical factors than US economic strength. In short, the Greenback is benefiting from the intertwined trends of risk aversion, capital flight from emerging markets, unwinding of carry trade positions, and the perception that the US is a safe haven to invest during periods of global economic uncertainty.

If this is indeed the case, shouldn’t the Dollar rally eventually come to an end? Based on economic fundamentals, the answer is a resounding ‘yes.’ The twin deficits of trade and government spending are unlikely to abate as a result of the credit crisis. In fact, the trillions of dollars in fresh government spending, combined with a decline in exports wrought by the suddenly strong Dollar, will probably exacerbate these dual trends. Based on almost every measure, the US economy remains dangerously over-leveraged. Fueled by cheap credit, household debt, government debt, and financial sector debt have exploded over the last couple decades, such that total US debt is estimated at a whopping %350 of GDP. Given that both China and the Middle East are facing domestic economic crises brought on by a drop in exports and a decline in the price of oil, respectively, it seems unlikely that they will have the resources, let alone the inclination, to continue to fund this debt. Seeking Alpha reports:

Chinese have recently lowered interest rates considerably, have started large domestic stimulus packages and have even tried to depreciate their currency. Again, one should anticipate a much lower appetite for U.S. assets going forward.

Read More: Will the Dollar Rally Survive?

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Posted by Adam Kritzer | in US Dollar | No Comments »

Could the RMB Fall?

Dec. 2nd 2008

Since China revalued the Yuan in July 2005, it was considered a foregone conclusion that the currency would continue appreciating at a steady clip. The global credit crisis, generally, and the Chinese economic downturn, specifically, has turned that assumption on its head. Last week, the RMB declined by the biggest margin since the revaluation, prompting speculation that China will adopt a currency policy diametrically opposed to that which it has pursued over the last few years. The move also coincided with the annual China-US trade summit, attended by none other than Treasury Secretary Henry Paulson. The new consensus among currency traders (proxied by futures contracts) is that the Yuan will depreciate slightly over the next two years, as China moves to provide a boost to its export sector. Given that the currencies of most of China’s Asian neighbors have fallen by double digits over the last year, the Yuan may have to fall sharply in order to maintain competitiveness. The Wall Street Journal reports:

the Chinese currency hasn’t experienced a large devaluation in at least a decade. Such a move would go against the realities of geopolitics and against signals that Beijing is more focused on boosting domestic consumption than on stimulating exports.

Read More: Will China Finally Try Wielding Its Yuan?

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Posted by Adam Kritzer | in Chinese Yuan (RMB), Politics & Policy | No Comments »

New Treasury Secretary Understands Currencies

Dec. 1st 2008

What does the appointment of New York Federal Reserve President Timothy Geithner as Treasury Secretary mean to forex traders? To answer this question, it depends on which side of the Dollar you fall in. Geithner worked in the Treasury Department under Bill Clinton, which means he is well versed in the Strong Dollar policy. It is not clear whether such a policy will be implemented under the Obama administration, which may be counting on the export sector to fill the gap created by a decline in domestic consumption. Regardless, the consensus among analysts is that Geithner understands currency markets, and is not likely to take steps that will rattle them. This would mark a sharp break from his predecessor Henry Paulson, whose bungling of the economic bailout has given rise to record levels of volatility (read: uncertainty) in forex and financial markets. The Australian reports:

"For all the currency traders out there, this means he was in charge of US dollar policy and is steeped in the nuance of the currency markets…Unlike during rookies Paul O’Neill or John Snow’s tenure, we won’t get many mistakes to make easy money," said [one analyst].

Read More: ‘Safe pair of hands’ Timothy Geithner tipped for US Treasury

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Posted by Adam Kritzer | in Politics & Policy, US Dollar | No Comments »

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