US Dollar Testing 3-Year Highs as NFPs and Nationalization Loom

Published February 28th, 2009 - 08:09 GMT

The world’s most liquid currency ended the week in a precarious technical and fundamental position. For those watching the charts, the Dollar Index closed Friday just off a three-year high. And, making sure to keep market participants engaged until liquidity returns on Monday, fundamental traders are debating the appeal of a currency that represents a ballooning recession, a market-wide demand for safety and the dawn to a period of nationalization.




US Dollar Testing 3-Year Highs as NFPs and Nationalization Loom

Fundamental Outlook for US Dollar: Bullish

-    The US government moves one step closer to nationalization with a 36% stake in Citi
-    With global rates falling to zero and recession spreading, is the dollar is taking the top safe haven spot from the yen?
-    Growth contracted more than expected and the fastest pace in 26 years according to GDP revisions

The world’s most liquid currency ended the week in a precarious technical and fundamental position. For those watching the charts, the Dollar Index closed Friday just off a three-year high. And, making sure to keep market participants engaged until liquidity returns on Monday, fundamental traders are debating the appeal of a currency that represents a ballooning recession, a market-wide demand for safety and the dawn to a period of nationalization.

Looking ahead to next week and beyond, with so many major fundamental themes evolving throughout the markets; the dollar will have decide which driver will take precedence. The most pressing (and novel) concern for the greenback is the US government’s trend towards nationalization. The stakes were raised this past Friday when it was announced that the Treasury was taking a 36 percent stake in Citi – the world’s largest financial firm. This was a blatant move by officials after a series of questionable steps towards government stewardship that includes: seizing control of Freddie Mac and Fannie Mae; taking over insurance giant AIG after extending it a $150 billion credit line; and announcing that loans from the tax payers coffers will now come with the price of convertible preferred shares from those lending. In normal markets, such a move would spark fear that investor equity could vanish and returns could be dampened. However, it is obvious that we are not experiencing normal market conditions. Global growth is cooling, returns are shrinking, risk of financial seizures is high and many of the world’s largest economies are adopting a similar policy. At this point, the government likely sees this intervention as necessary to ensuring further financial time bombs don’t revive the financial crisis and send the nation into a tailspin that it cannot pull out of; and the markets may agree.

How long the dollar can hold out as the headwinds to free-market economics increase is debatable. One key determinant for the currency is its status as a safe haven. Since the plunge in Japanese GDP numbers led investors to rethink the viability of the yen as a reliable asylum for capital, we have seen investors head towards the US dollar to purchase Treasuries and other low-risk, American assets. Clearly, this dynamic depends upon the presence of risk. There are plenty of indicators and signs to support the proliferation of fear; but ultimately this market driver is a product of sentiment. Should the balance of risk/reward invert and the S&P 500 reverse course, there is little need for a safe haven whose economic recovery will be stifled by its government’s presence.
 
The final fundamental engine to vie for control of the dollar’s future could help shape long-term trends and short-term volatility. When the dust clears and fears that key market players aren’t on the verge of collapse, global traders will once again look at economic growth to gauge the potential for returns. As it stands, the United States is suffering one of the worst recessions in the industrialized world; but aggressive policy actions and a deep market has left the market feeling that the economy and its dollar is perhaps ahead of the curve. Timely data schedule for release this week will deny or confirm that unspoken claim. Readings of personal and spending, manufacturing and service activity, as well as consumer credit will be treated as second tier data in comparison to Friday’s NFPs. The American consumer will very likely decide the extent and length of this recession; and a confirmed 625,000 additional jobs lost will certainly undermine speculation that the world’s largest economy can recover before its global counterparts. - JK

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