Friday, August 08, 2008

Why the Dollar Rally?

The U.S. Dollar Index has taken off and I'm left wondering; why? I understand gold and oil sold off, the broad indexes are undergoing a bear market rally, and the Fed kept rates steady and expressed concerns over keeping inflation in check. So, how do you connect the dots (if they can be connected) and what else am I missing?
The articles I have found so far give the following correlations:
-The European Central Bank announced expectations of slowed Euro growth. OK, that might explain the Euro/U.S$ correlation, but there are multiple currencies within the U.S.$-index.
-A short squeeze? "The euro crashed through "big support levels in a short period of time," said Kenneth Broux, an economist at Lloyds TSB. "A lot of participants were caught out and forced to liquidate" long euro positions." Perhaps the Euro-zone is slowing down and starting to mirror the situation the U.S. economy has been in for the past 9 months (a.k.a. recession whispers)?
-"...better-than-expected U.S. pending home sales data Thursday and, in particular, the Chinese government's recent imposition of new currency controls were likely among the catalysts for the dollar's broad surge in Asian trading."
"Currency strategists at Commerzbank also downplayed the ECB's role, saying the moves during Asian hours were clearly a reflection of broad "dollar strength," rather than euro weakness...Obviously many market participants are currently re-positioning their currency allocations and [betting] on an end of the prolonged sideways movement."

-"The Chinese measures may be among the triggers they said, leaving investors who had bet on high-yielding currencies or continued gains by China's yuan currency with few alternatives other than the dollar. That backdrop also underpins the Japanese yen, they said, as traders abandon carry trades in which they borrow low-yielding currencies then use the funds to buy assets denominated in higher-yielding currencies."
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Commodity positions are unwinding. "...investors are long commodities, the currencies of countries that benefit from increases in commodity prices, their stocks and their bonds. In addition, many investors are invested in countries benefiting cross-border capital flows tied to increases in commodity prices (Eastern Europe, for example, which, according to the BIS, has been a major recipient of money from the Middle East). The U.S. dollar is a major safe-haven amid this major unwind." This I can see having a pretty broad ripple effect.
-As part of the above explanation, the Australian dollar continues to slide. The longest consecutive decline since 1980. Another commodity correlation.
-Some more articles can be found here. I think my understanding is clearer, but still a little fuzzy.


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