Investors Seek Safe Havens

In today’s economic crisis investors are seeking safe havens from the financial storm that is battering the world’s economy. Throughout the world markets are plunging, and companies seeking credit for day to day operations are forced to lay off employees and consumers are fearful and spending less adding to the economic crisis. One of these safe havens for currency investors is the US dollar which continues to offer Forex opportunity in troubled times.

Disappointing Statistics

Disappointing economic statistics released Friday sent stock Markets plummeting throughout the world. In Europe the Markit Purchasing Manager’s Index fell to its lowest in 10 years. In Asia currencies sank on Forex markets making it harder for companies to pay off debt that is in Dollars and Euros. The exception was Japan where the Yen rose to a 13 year high. Japanese exports are floundering and the deepening economic crisis in the US and Europe is sure to have an adverse affect on Japanese exports. Despite the negative economic statistics global currency markets continue to provide investors with Forex opportunities.

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The Original Conference

In 1944 in the sleepy New Hampshire town of Bretton Woods 730 delegates from allied nations met to discuss and set world monetary policy. Previous to the meeting economic policies were determined by a myriad of individual, and often conflicting, treaties and trade agreements and progress was often hampered by tradition. During the great depression inflation made the currencies of many countries worthless which only exacerbated the effects of the global depression. The intent of the conference was to rebuild the world monetary system with some semblance of predictability and security.

IMF Established

The conference was the beginning of the International Monetary Fund which was to set monetary policy for decades to come. The nations involved agreed to allow free markets to work with minimal government intervention, limit trade barriers, and accept the intervention of the IMF to regulate the finances of member nations. Many nations involved would have preferred more regulation of markets and state intervention in their respective economies but the devastation of the war prompted the signing of the Bretton Woods agreement. The US demanded, and got, a leadership role in the IMF.

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Investor Confidence Returning

On Tuesday the Euro rose sharply against the Japanese Yen signaling investor confidence that the coordinated European bailout plan will revive floundering banking systems. The gain followed announcements by Britain, Germany and France to recapitalize their banking systems taking the apprehension out of extreme risk aversion and hastening the selling of the Japanese Yen. The US dollar remained strong against most major currencies providing investors with plenty of Forex opportunity.

Yen Gains Amid Recession Fears

Last week the Japanese Yen saw stunning gains as investor uncertainty over how much deeper the global financial crisis was going to get prompting many investors to unload risky carry trade positions as global share prices fell sharply. The US also announced plans to recapitalize banks. Insiders familiar with the US plan said that about half of the proposed $250 billion would go to the nation’s largest banks. Japan’s Finance Ministry announced plans on Tuesday to stabilize financial markets, including the passage of a law enabling public fund injections into regional banks.

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Stock Market Gains

Last week’s doom and gloom in world stock markets was tempered by Monday’s astounding gains, the largest since the great depression. The Dow rose 11% the largest one day gain since 1933. It was the 5^th largest percentage gain ever and followed a weekly 18% decline, the largest in the New York Stock Exchange’s history. The gains followed a weekend of meetings of central banks and the International Monetary Fund and the announcement of government plans to rescue banks through direct capital injections. Despite the doom and gloom the performance of the US dollar in currency markets continues to offer investors plenty of Forex opportunity.

Rally-Temporary or Not ?

Investors are debating whether the rally will be temporary or signal more stability in world markets. Market rallies have a mixed history. Of the five past one-day gains of 10% or more, two marked the end of bear markets, in 1987 and 1933. Three others, in 1929, 1931, and 1932, were followed by further declines in the market. Because of this mixed history it is difficult to predict what direction markets will take.

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European Leaders Meet to Address Crisis

French President Nicolas Sarkozy said that he expects Sunday’s meeting of 15 European leaders to produce a united coordinated plan to battle the effects of the current financial crisis. Decisions made by leaders of Eurozone countries will be submitted to the 12 remaining European Union countries at a planned European Union summit Wednesday. Said French President Sarkozy, “I expect an ambitious, coordinated plan that brings solutions.” Currency markets have been in disarray but the US dollar is holding steady and many investors are flocking to the dollar for the safety and Forex opportunities it provides in times of crisis.

Coordinated Measures to Stabilize Markets

In a hopeful statement German Chancellor Angela Merkel said, “Our goal is to define a coordinated joint action for the Eurozone, so that we can in the coming days take national measures that stabilize the financial markets, but that also don’t discredit the individual member states.” Before the summit Sarkozy He met with British Prime Minister Gordon Brown. The partial nationalization of some British banks could serve as a model for Eurozone countries despite the fact that the UK does not use the Euro as currency.

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UK Bailout

On Wednesday Britain announced a 1.23 trillion dollar rescue package that included part nationalization of eight of Britain’s largest banks. Immediately after the UK bailout was announced the Bank of England announced an interest rate cot of 0.5%. The US Federal Reserve bank also announced rate cuts reducing its rates from 2% to 1.5%. As part of the $1.23 trillion rescue package, the British Government said it would invest pound stg. 150 billion ($364.3 billion) directly into banks, establish a pound stg. 200billion special liquidity fund and guarantee pound stg. 250 billion of bank-to-bank loans. During the global financial crisis many investors are seeking the safe haven of the dollar which remains strong and continues to offer Forex opportunity on global currency markets.

The IMF Weighs In

The move was designed to prevent the banking and credit crisis from reaching the real economy. The move did not prevent a decline on the London exchange which fell 6.5% but recovered by the end of the day posting a decline of only 2%. On Wall Street the Dow opened down 2.08%. The International Monetary Fund cut its world growth projections to 3% and predicted growth of industrialized countries to near zero warning that it could fall even further. Developing countries are expected to maintain ‘reasonable’ growth levels. The IMF still believes the world will avoid a recession but warned of increasing risks.

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Stock Market Falls

Stock markets and other financial markets took a dim view of the future today (Oct. 6, 2008) with the Dow Jones Industrial Average falling below 10,000 for the first time since 2004. Credit markets remain strained and investors are wondering if the $700 billion dollar bailout will not work quickly enough to unfreeze credit markets. The credit crunch is starting to affect the average wage earner causing a crisis of consumer confidence.

Banks made bad bets on mortgage backed securities and are saddled with these securities and remain starved for cash. Stocks have taken a beating in the US, Europe, and Asia causing investors to seek the relative security of US government debt and the rising dollar continues to provide Forex opportunities. Oil dropped to below $90 dollars a barrel due to fears of a global recession.

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Bailout Passes House

Friday the US House of Representatives passed the bailout bill by a vote of 263 to 171. The bill was immediately signed by President Bush. In a Rose Garden appearance at the White House Bush stated, “By coming together on this legislation, we have acted boldly to prevent the crisis on Wall Street from becoming a crisis in communities across our country.” The bailout bill remains unpopular with US taxpayers and the revised version of the bill contains many earmarks unrelated to the bill’s original intent.

Bush Administration Lobbies House

The House vote followed intense lobbying by the Bush administration and supporters of the bill. The law essentially allows the US government to purchase toxic assets from troubled banks and financial institutions. The bill is designed to inject massive amounts of money to loosen all but frozen credit markets. Recent market events such as the record fall of the Dow Jones Industrial Average earlier in the week and a worse-than-expected monthly jobs number with 159,000 jobs lost in September. How all this will affect world currency markets is uncertain at this time but many investors are flocking to the dollar seeking the safety and Forex opportunity the dollar provides in times of crisis.

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Earmarks Defined

Wednesday evening, October 1^st, the US Senate passed the revised bailout bill. The bill had many earmarks added to it. For those not familiar with the term earmarks-an earmark is a totally unrelated amendment added to a bill usually added surreptitiously. Despite opposition by the public, earmarks are a long standing tradition in the US House and Senate. An earmark enables a legislator to insert a piece of legislation that that could never stand scrutiny in a public debate.

Earmark Examples

The new bailout bill is 451 pages long and contains many earmarks ranging from the amusing to the utterly ridiculous. Here are some of the more egregious earmarks;

Film and Television Productions (Sec. 502)

Wooden Arrows designed for use by children (Sec. 503)

6 page package of earmarks for litigants in the 1989 Exxon Valdez incident, Alaska (Sec. 504)

Virgin Island and Puerto Rican Rum (Section 308)

American Samoa (Sec. 309)

Mine Rescue Teams (Sec. 310)

Domestic Production Activities in Puerto Rico (Sec. 312)

Indian Tribes (Sec. 314, 315)

Auto Racing Tracks (317)

Wool Research (Sec. 325)

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Effects of the Current Crisis

The current financial crisis will affect many aspects of the life of the average person in the foreseeable future. Investors will see shrinking portfolios, job prospects will dim, and retirement funds will dwindle. Credit markets will freeze; small businesses will feel the pinch and many will see their net worth diminish.

The Financial Crisis and US Leadership

The financial crisis may also have an unforeseen effect-the limitation of the US to exert a leadership role in world affairs. Since World War Two the US has been the most powerful nation militarily but just as important is the reputation of the US as a financial powerhouse. New York has long been considered the world’s financial center. The status of the US dollar as the world’s dominant currency gave it special powers and privileges. “The dollar’s status as a reserve currency … has given the U.S. a privileged measure of economic stability relative to its rivals,” said journalist Sebastian Mallaby, of the Council on Foreign Relations. “It has allowed the U.S. to project power abroad, too.”

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