Dollar Surges; Market Rallies to 11,734 (+2.6%)
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It's about the dollar friends!
Out of the depths of no respect and the muck and mire heaped upon the U.S. currency by not only the world at large, but by our own media, the dollar surged Friday to its best one-day performance in more than six years. And along with it, the Dow Jones Industrial Average rose 302.89 points or 2.6% to 11734.32.
Historically, the dollar runs in bull and bear cycles of five to seven years. The current down cycle of weakness is approaching the upper limit of that range. It should be noted that a change in the dollar's fortune is not always due to fundamentals, but also by how it rates to other currencies in comparison. That is what appears to account for the dollar's surge on Friday. There is a growing feeling that European economies are going to be in for some serious pain, weakening the euro.
After months of focusing on the slumping U.S. housing market and weakness in the banking system, currency traders shifted their concerns to signs that Europe's economy is slowing and to warnings from Japan's government that their economy could be slipping back into recession. This caused traders to unload other currencies and buy the buck.
Implicit in this move by the dollar has to be the thinking that the U.S. economy is seen as eventually rebounding just as the foreign economies are weakening. This could compel the European Central bank to lower interest rates, bringing European rates closer in line to those in the U.S. But remember - a stronger dollar will make our exports more expensive and those exports have been booming, helping to keep the country from sliding into full recession. At the same time, things we buy - and we buy tons - will become cheaper.
Meanwhile, the banking mess marches on. The latest sand in the oil of the system is an arcane instrument, little known to many, called an auction-rate-security. These are a type of security that soared in popularity in recent years. They let issuers such as municipalities and student-loan organizations borrow for the long term, but at lower, short-term rates. The rates are reset at periodic auctions and hence the name. However, some of the securities are tied to mortgage securities, and those have lost significant value in the credit crunch. This in turn caused new buyers to dry up at the auctions and little or no market for those who wished to sell their securities.
These securities were marketed to investors as a safe place to store cash at interest rates higher than stable money-market funds. The total market for the securities once topped $330 billion, but started to topple in February. Now state regulators from New York and Massachusetts have sued Merrill Lynch and UBS for civil fraud for not fully disclosing the risks involved in the securities. UBS has settled with regulators by vowing to buy back $19 billion of the securities. That settlement will put pressure on other firms to follow suit. The end result will be another round of write-downs. Another good example of caveat emptor - buyer beware!
So remember to keep your risk within your tolerance and keep ahead of inflation.
I invite your questions.
Or Contact Jerry Cole at:
509 Center Ave, Suite #102, Bay City, MI
(989) 892-5055
(The opinions expressed are solely those of the author and not Gen worth Financial Securities Corporation or of www.mybaycity.com)509 Center Ave, Suite #102, Bay City, MI
(989) 892-5055
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Jerry Cole - Retirement, Investment |
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