Author Topic: Question for the Experts; Rising USD?  (Read 1759 times)

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Question for the Experts; Rising USD?
« on: October 07, 2008, 01:52:53 AM »
There's something very weird happening with the dollar. It's rising astronomically against every major currency in the world when, based on my limited understanding of economics it should be plunging to all time depths. I'm sure a search of some financial publications would reveal why but does anyone know the specifics?

Come to think of it, I was reading the other day that a lot of the money fleeing wall street is finding a home in US treasury bonds even when they are going to result in a slight loss. That could have something to do with it and if that's the reason then I think the rise may be very short lived.

My life is based on currency exchange rates since I am always moving around, so if the experts chime in, it would be much appreciated. This will be short lived, won't it?
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Re: Question for the Experts; Rising USD?
« Reply #1 on: October 09, 2008, 05:27:16 PM »
Many factors affect currency cross rates.

Please remember that currency moves are generally based on expectations regarding future prices or levels based on underlying economic themes.

Therefore, dollar sold of sharply last year in anticipation of the Economic problem ahead - e.g. US Fed would be forced to cut rates to stimulate the economy. Also, please note expectations regarding US banks borrowing money decreased significantly and therefore reason why the carry trade had ended. Please see the USD-YEN cross for indication of ending of carry trade - remember banks would borrow YEN and then convert by buying dollars and then putting this into higher yielding assets in the US.

Now keep in mind, the crisis began in US but expectations regarding European banks and positions were priced in much later when it was clear that Europe had just as much CDO and CDS junk as the US did then slowly expectations unfold regarding future of UK or Europe banks borrowing money and investing in their own Countries. Also, the cross has priced in rate cuts in Euro zone and UK which were inevitable has banks need to stimulate the economy through Monetary expansion.

Please don't view the market so simplistically, if everything was that easy we would all be rich by your reasoning alone. Their are many factors which affect currency moves and their are major sharks who play the currency markets - hence reason why i do not trade currency markets with much size as i have very little edge regarding news or other factors affecting the cross.

Number 1 lesson would be to always think about future expectations - the market always tries to price in moves in the distant future - right now USD holding up well against Euro and the Pound is tanking based on banks meltdowns in the UK.

Hope this helps. If you rely on currency exchange rates on a day to day basis please open an account with a broker of your choice and simply hedge your risk to remain in a delta neutral position. I have hedged many times when going on holiday to take take advantage of this.

Sorry for simplicity but currency markets are not my speciality - maybe someone can help further.