Dollar Index And The Financial Sector

Daily Forex Fundamentals | Written by TheLFB-Forex.com | Aug 13 08 21:11 GMT |

Dollar Index: During an interview with CNBC on Tuesday, Minneapolis Federal Reserve Bank President Gary Stern said that the decline in energy prices has slowed the inflation outlook, allowing the Fed "to be patient" when it comes to considering raising interest rates. In a recent speech he said that the Fed would need to raise rates "sooner rather than later," but now believes it "pays to be patient" with monetary policy changes. Mr. Stern also said "I think it will be a close call," with regards to whether the U.S. goes into recession. Also on Tuesday Dallas Fed President Richard Fisher, who voted to increase rates last week, said the U.S. faces “a sustained period of anemia” and that “in the second half of this year we will broach zero growth.” And Richmond Fed President Jeffrey Lacker, who isn't an FOMC voter but is known to hawkish, said there is a chance of recession and that “it's hard to gauge when we're going to hit a bottom in housing.” On the charts, the index is continuing to maintain above a weekly resistance trend line drawn from October 12 2006 through June 14 and Aug 16 2007. On the day, the index rose .087 (0.11%) to 76.239.

The Financial Sector: The sector took another hit on Wednesday after Merrill Lynch (MER) Chief Investment Strategist Richard Bernstein said investors are "significantly underestimating" potential losses from credit-related write downs and said the credit crisis is "far from over" and Guy Moszkowski, Merrill's top-rated analyst for securities firms, downgraded Morgan Stanley (MS) whose shares lost 5.53%, Goldman Sachs (GS) which lost 1.43%, Lehman Brothers (LEH) down 3.95% as well as Citigroup (C), whose shares lost 0.73%. "Conditions have deteriorated significantly from July," wrote Moszkowski. "The typical summer slowdown has been exacerbated by renewed fear over credit, the direction of the economy, and home-price depreciation, along with the sudden about-face in the oil price and hedge-fund losses." That led to a broad sell off among financial firms, as the KBW bank Index plunged 4.11%. And in a sign of continuing liquidity stress, The Federal Reserve reported its Term Auction Facility (TAF) offering on Monday lent $25 billion for 84 days with a rate of 2.754%, well above the 2.00% target and 2.25% discount window rates. Bidders had requested a total $54.8B. Monday's auction was the first of the $25B 84day loans, which the Fed said in July would be offered in addition to the $75B 28 day auctions it runs every two weeks. The Fed has said that biweekly TAF auctions will alternate between $75B 28 day loans and $25B 84 day loans as long as financial conditions warrant. The XLF closed on 20.57 after falling 0.61 point (2.88%) on relatively heavy volume of 229,047,378, against the daily average of 174,995,000. Volume in the XLF has increased over 70% on a daily basis since the beginning of July.
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U.S. Session Wrap Short sellers get naked again?

The rule against naked short selling against 19 financial stocks expired after Tuesday's trading session, and financial stocks took a hit on Wednesday after Merrill Lynch warned the credit crisis is "far from over" while it downgraded the shares of rivals Goldman Sachs, Morgan Stanley and Lehman Brothers. The S.E.C.'s restriction didn't do much for the shares of financial firms anyway, as Arturo Bris, a finance professor at IMD business school in Lausanne, Switzerland, found that the SEC-imposed restraints "contributed to a decline in share prices for the 19 stocks" totaling about $60 billion. Depending on whether you use the IMF ($1 trillion) or Nouriel Roubini ($2 trillion), since financial firms have written off about $500 billion of losses, we're either 50 or 25 percent through the worst credit crisis since the Great Depression. It's almost quaint to think that Lehman's shares declined nearly 50% in 1973 when the firm announced it had lost $6.7 million on some wrong-way interest rate bets.

At the close of floor trading on the NYSE, the DOW was on 11,532.96 after falling 109.51 (0.94%). The index had been down 190 points at one point during the session The S&P closed on 1285.83, down 3.76 (0.29%) while the NASDAQ finished trading on 2428.62 with a decrease of 1.99 (0.08%). Treasuries were actually lower even as traders moved away from equities. The two-year note yield rose 5.3 basis points to 2.472%. The benchmark 10-year note gained 4.6 basis points to yield 3.941%. The dollar was mixed during N.Y. trading, losing to the euro (0.05%) and yen (0.24%) while trading much higher against the pound (1.43%).

In other news, it appears that the Russian/Georgian conflict is taking a new turn. President Bush announced that U.S. military aircraft carrying medical supplies to the Georgian capital of Tblisi left for the area Wednesday morning, warning Russia that he expected it to be allowed to deliver its aid. Russian troops pushed deep into Georgia, aiming to seize the strategic city of Gori and cutting the main highway that crosses the country. It may be possible that Russia might eventually take over control of three BP pipelines that run through the country, but its aims may be to make an economic gain rather than to cut off the supply.

Demand for liquidity by global banks is still in evidence as the Fed, ECB and SNB continued to pump U.S. dollars into the banking system. The ECB said it allocated $20 billion in a 28-day dollar auction and demand was high as total bids amounted to $91.1 billion, more than four times the amount allotted. The funds were offered at a fixed rate of 2.45%. The Fed said it awarded $50 billion in 28 day credit at 2.45% out of $75.46 billion in bids received. The SNB auctioned $4 billion at 2.01%. The bank reported that demand totaled $11.60 billion.

Crude oil for September delivery rose $3.46 (3.06%) to close on $116.47 a barrel after a U.S. government report showed a bigger-than-forecast decline in inventories of gasoline.

Gold futures for December delivery rose $16.90 (2.1%) $831.50 an ounce on speculation its recent 12% decline was excessive.

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