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The Schizophrenic Buck...What's Coming Next In Forex?

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The Schizophrenic Buck...What's Coming Next In Forex?

Post by Sean on Sun Dec 21, 2008 5:46 pm

The Schizophrenic Buck:
What's Coming Next?

Good Day Currency Traders,

After steadily rising for months, the buck started its freefall two weeks ago. This massive reversal left Forex traders asking if the buck has finally turned the corner.

But hold on. It now looks like the dollar rally isn't quite done yet - at least in the short-term. In fact, the currencies took a breather overnight as the dollar bounced back up.

At the same time, the euro is also strangely holding strong. When we left the office last night, the euro was still holding above US$1.42, but the single unit dropped three cents overnight and is now hovering around the US$1.39 level.

This euro drop was to be expected, and it serves as an excellent opportunity for investors who were afraid they had missed out on getting back into the currency market.

Up, Down, Now Up Again - But Why?

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I have searched the news wires this morning, and I just can't find any good reasons for the dollar's bounce other than the dollar had simply fallen too hard, too fast.

One my fellow traders and I were talking about this yesterday morning, as we stared at the trading screens in amazement. The dollar's move down over the past two weeks was even faster than the move up earlier this year.

My colleague, Chuck had warned readers during the dollar rally that the strength was only temporary, but the reversal was just too quick. This move back up is healthy for the markets, and will allow investors another opportunity to move back in.

Also, Chuck is still predicting that the dollar strength will hold as long as the contagion from the credit crisis remains in the markets. This means the dollar will be on a rollercoaster for a few more months until Fed officials finally manage to unclog the credit markets.

You Could Spin This as Good News for the Economy - But It's Not

The U.S. jobless numbers were better than expected. They dropped to 554,000 from an adjusted 575,000 last week. The continuing claims also fell to 4,384,000 out of work. Leading indicators fell .4% during November, and October's number was revised to -.9%.

So while you could say these were positive numbers (not quite as bad as the last ones), they still reflect an economy, which is continuing to falter.

Treasury Secretary Paulson will be heading back to Congress to claim the second half of his US$700 billion bank rescue plan. He's probably hoping Congress will be in a giving mood with the holidays coming next week, and Congress will go ahead and let the additional funds loose.

But Paulson may have some trouble securing the additional funds as lawmakers have warned the Bush administration it must come up with a new effort to aid homeowners and get aid directly to their constituents.

Paulson is also probably worried that Congress may pull back some of the promised funds and earmark them for the new administration's stimulus package.

So now we have present and future administrations fighting over who will get to spend taxpayers' money. And Paulson is doing his best to get all of it spent before he rides off into the sunset.

Do the Politicians Really Think We're Idiots?
Chuck spent a tough day at the eye doctor yesterday, but still sent me the following note:

"As reported by the Wall Street Journal...

"Obama's economic team is crafting a stimulus package to send to Congress of US$675 billion to US$775 billion over two years, according to transition officials. The transition team has conveyed the figures to Capitol Hill, where the package is likely to grow as it works its way through the House and Senate.

"Obama aides hope to keep the package below the trillion-dollar mark, as they fear being accused of adding too much to the country's long-term budget deficit."

I laugh! As if! As if US$775 Billion "won't add too much to the country's long-term budget deficit!" I give up. The government thinks we are all buffoons! They really do. They see us as village idiots, thinking that if they keep it below US$1 trillion, we ‘won't notice!'"

Crazy right? We now have administrations fighting over bailout funds, a touchy dollar that's bouncing for the first time in two weeks, and a euro that's holding around US$1.39...and all a week before Christmas.

Have a wonderful weekend!


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