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Originally Posted by Tully Mars
What's your take on the feds dropping the rate another quarter and how do you see that affecting the dollar?
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The Fed can do nothing to improve inter-party perception of solvency....the banks will be even more reluctant to make "overnight" loans to each other. The rate for that type of transaction is the only rate that the Fed thinks it is in control of.
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http://biz.yahoo.com/rb/080316/markets_forex.html?.v=1
Dollar tumbles, shrugs off Fed's emergency steps
Sunday March 16, 11:27 pm ET
By Rika Otsuka
TOKYO (Reuters) -
.....The market shrugged off news late Sunday that the U.S. Federal Reserve announced fresh emergency measures to stem a fast-spreading financial crisis, using tools it has not used since the Great Depression.
The move came after Bear Stearns' cash reserves were drained by fleeing customers on Thursday. On Friday the investment bank secured emergency funding from the Fed, extended through JPMorgan.
JPMorgan said on Sunday it would buy Bear Stearns in an all-stock deal, and that the Fed would fund up to $30 billion of Bear Stearns' less liquid assets.
"Market players are afraid that there will be a second and third Bear Stearns out there," said Kosuke Hanao, head of forex sales at HSBC in Tokyo.
The dollar fell sharply, hitting record lows against the euro and Swiss franc and striking a 13-year low under 96 yen, on deteriorating confidence in U.S. assets due to tightening credit conditions and concerns that the world's biggest economy is already in a recession.
Investors have dumped the dollar in recent months on doubts about the Fed's ability to handle a spreading crisis in the U.S. mortgage bond market, which is causing credit market turmoil and offsetting its efforts to help the economy by slashing rates.
"The market is totally panicking," said a trader at a big Japanese bank. "The fact that the Fed had to announce its emergency steps on Sunday night highlighted the seriousness of the situation."........
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The Fed is trying to give the impression that it has things under control. The perception is that the Fed is exhibiting a panicky reaction contradicting the impression that it has things under control.
The Fed cannot improve the credit worthiness of primary dealers, and it cannot spur demand in the economy that isn't there.
Each Fed rate cut, and another full point cut on tuesday would not be a big surprise, lessens incentive to own dollars in anticipation of superior return over holding other currencies or precious metals.
Short term, paper assets besides T-Bills will be sold, T-Bills and precious metals will be bought. Soon, everything will be sold to meet margin calls on poorly performing paper assets, so even precious metals, stocks of companies that mine them, and petroleum and oil service company stocks will all be sold.
Within a year, the dollar will buy more, as the prices of everything else, including oil, gold, stocks, and real estate fall to a lack of demand.
The first phase seems likely to be an inflationary recession, deteriorating into a severe stagflationary recession, eroding further into a deflationary depression.
No matter how the Fed postures, it is trying to encourage inflation in reaction to massive systemic debt and discourage the deflation trend that collapsing demand predictably triggers. When demand is sharply reduced, sellers become more willing to sell at any price.
All exporting nations will attempt to reduce the valuatiions of their currency, a competititon in which the US has an enormous head start.
The Fed is also trying to persuade asset holders not to sell. Now seems to be the best time to sell everything. The "obvious" move on friday was to buy Bear Stearns near the close, at it's new low price of $30, and sell march call options, which expire at the end of the coming week, for at least $600 each.
Those who did that trade ended up paying $24 net for each share of Bear, and they lost $22 per share today.
The likely scenario tomorrow in the US market is a lower opening, morning trading down, and a tradeable bounce up before the close. That seems less obvious than a lower open and down, down into the close, especially with the expectation of a 3/4 pt. or more Fed rate cut announcement coming the next day.
None of the Fed rate cuts so far have done much but pressure the dollar's exchange rate down. This isn't about interest rates, it's about deteriorating credit quality. All of this will trigger rising unemployment. Then the downturn in housing valuation will begin to be driven by fundamentals other than the mislabeled "subprime loan" crisis.
Before tomorrow, stocks like KBH and CTX were still in the 20's, good stocks to buy put options on, or to shortsell to attempt to neutralize the risk of dropping valuation of your own homes.... Before this is all over, I doubt that CTX will avoid BK....too much debt.