Dollar Index And The Financial Sector

Dollar Index: The index gained strongly on the day as the dollar made headway against all six componets. It was almost as if the dollar caught the best of both worlds as it gained on the high yielders in the overnight session and into N.Y. on a risk-aversion move. And while the dollar did fall against the Yen during that time, the late afternoon equity surge (which eventually abated), helped the dollar to a positive day on the yen.

Also helping the index this week was the disconnect between the Australian dollar (which fell over 1300 pips for the week) and gold, which rose nearly 11% after Thursday before falling back on Friday. The dollar also got a big boost against the loonie, which declined 8.34% this week as crude fell 13.52%.

On Friday, the dollar gained 1.43% against the euro, 0.14% against the pound, 5.97% (!) on the Austrailian dollar, 0.56% against the loonie, 0.78% on the Swiss Franc, 1.50% against the Swedish Krona and 0.86% on the yen. The dollar index gained 127.5 basis points (1.57%) to 82.438.

The Financial Sector: Market participants who were looking at the credit markets for signs of easing certainly didn't see that in the morning's Libor fixings. Three month dollar Libor rose another 8 basis points to 4.82% and the TED spread widened to a mind-numbing 453 basis points by 11:30 EDT as yield on 3-month bills fell to 0.29%. The Libor-OIS spread climbed to a record 366 basis points. Overnight rates fell 262 basis points to 2.47% as central banks remained the only source of funding. Banks added more liquidity; The ECB yesterday offered banks as much cash as they required for six days at its benchmark interest rate of 3.75%. It also loaned banks a record $100 billion in overnight-dollar funds at 5.00%, 350 basis points above the Federal Reserve's benchmark rate. Today, it allotted four-day cash at 0.5%.

The Wall Street Journal is reporting that the U.S. may follow the U.K. in guaranteeing billions of dolars in bank debt. The British government's plan would guarantee up to £250 billion ($432 billion) in bank debt maturing up to 36 months. The plan "has a lot of support from Wall Street" according to the WSJ. The article also said G7 officials intend to discuss the proposal over the weekend. White House spokesman Tony Fratto said the U.S. "is reviewing the idea and discussing it with our British counterparts."

Also being considered is a plan to temporarily insure all U.S. bank deposits. The move, which is only in the discussion stage, would be aimed at preventing a further exodus of cash from financial institutions, including small and regional banks, some of which are buckling under the strain of nervous customers. In recent weeks, customers have pulled money out of some healthy community banks under the assumption that the government will only insure all the depositors of larger banks in the event of a failure.

The sector declined heavily Friday morning as investors grew more fearful over the status of Morgan Stanley and Goldman Sachs. Morgan Stanley had fallen over 40% in New York on top of Thursday's 26% decline after Moody's put its A1 long-term rating on review for a possible downgrade. Moody's also lowered its outlook for Goldman Sach's Aa3 long-term rating to negative . Egan-Jones Ratings said Morgan Stanley probably needs to raise $60 billion in new equity to reassure customers and investors, up from a $30 billion estimate yesterday. The investment bank reportedly has about $900 billion of assets and an equity market value of $15.9 billion.

The WSJ article seemed to have helped the sector towards the end of the day although some of the losses were still sharp. Goldman Sachs declined 12.38% and Morgan Stanley 22.25% but JP Morgan Chase (JPM) gained 13.52%. Citigroup (C) gained 9.13%, Bank of America (BAC) 6.32% and Wells Fargo (WFC) 3.89%. The KBW regional bank index was up 8.47% on the day.

The XLF rose 1.41 points (10.30%) to close on 15.10. The volume was heavy: 526,315,899 ETF’s changed hands against a daily average of 251,885,000.

Written by TheLFB Trade Team, © 2007-2008 LFB Services, LLC. All rights reserved. http://www.TheLFB-Forex.com

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