Dollar Index And The Financial Sector
Dollar Index: The index traded in pure risk-aversion mode as equity markets plunged around the globe. Large gains were seen against the high-yielding euro, pound and Australian dollar at the same time as the yen made it biggest one-day advance against the greenback in at least the past 18 years. Also helping the dollar against the euro and Canadian dollar was the large decline in crude futures, which had declined $5.20 by 13:20 EDT. What isn't being seen now, but what has been seen during previous financial panics and/or economic slowdowns, is the dollar's gain against the Swiss Franc, which has traditionally been considered to be a "safe-haven" currency. One reason for that could be due to the SNB's target rate for 3-month CHF LIBOR, which is between 2.25% and 3.25%.
On Monday, the dollar index rose 111.3 basis points (1.14%) to 81.447.
The Financial Sector: Global markets got pummeled on Monday in part because investors did not understand the full implications of the Troubled Asset Relief Program (TARP). Many economists believed that while being an important first step, the purchase of the bank's bad mortgage paper would be insufficient to solve the problems at hand. The facts are that TARP confers a vast array of new powers to the Treasury and Federal Reserve which should go a long way towards easing the credit crisis.
For one, it allows the Treasury to guarantee the Fed against any losses it could incur should it decide to take the radical step of offering term loans on an unsecured basis to regulated banks at a fixed spread over its main interest rate which means that in essence, the Fed could decide to become the "counterparty of last resort" and be the intermediary for the interbank lending market. Naturally, the Fed would have control over interbank lending rates, which have risen in recent days to unprecedented levels as banks became mistrustful of each others' liquidity and solvency.
The Fed now has the ability to do this because the TARP grants the Fed authority to pay interest on deposits. The Fed could act as the counterparty in the interbank market (and thereby guarantee it) by paying interest that might be (for example) 100 basis points below the overnight rate and then use the reserves to make unsecured term loans at say 100 basis points above its main lending rate. The banks could in turn then lend to money market funds which would then use the capital in the commercial paper market, another facet of the financial system which has also recently been severely constrained.
The TARP also provides the Treasury with the financial resources and the legal authority to recapitalize failing financial institutions, subsidize rescue takeover deals, or guarantee the systemically important parts of a collapsing firm.
In addition to the powers mentioned above, TARP also includes provisions which will allow the FDIC to borrow unlimited funds from the Treasury and increase the amount it insures on deposits to $250,000. There will also be changes made in the fair value accounting rules, which will allow holders of mortgage assets to price them more closely with their own models rather than the firesale prices they may actually be trading for while markets remain extremely illiquid.
Citigroup (C) lost 5.12%, JP Morgan Chase (JPM) 4.14% and Bank of America (BAC) 6.55%. Wells Fargo declined 2.66% and Wachovia 6.92%. The KBW regional bank index fell just 1.31% on the day.
The XLF fell 0.98 points (-5.22%) to close on 17.80. The volume was on the heavy side: 341,118,814 ETF's changed hands against a daily average of 240,946,000.
Written by TheLFB Trade Team, © 2007-2008 LFB Services, LLC. All rights reserved. http://www.TheLFB-Forex.com
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