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Economic crisis over US dollar?
Topic: Economic crisis over US dollar? (Read 5916 times)
Economic crisis over US dollar?
September 20, 2007, 07:49:27 PM »
Fears of dollar collapse as Saudis take fright
By Ambrose Evans-Pritchard, International Business Editor
Last Updated: 8:39am BST 20/09/2007
Saudi Arabia has refused to cut interest rates in lockstep with the US Federal Reserve for the first time, signalling that the oil-rich Gulf kingdom is preparing to break the dollar currency peg in a move that risks setting off a stampede out of the dollar across the Middle East.
China threatens 'nuclear option' of dollar sales
Ben Bernanke has placed the dollar in a dangerous situation, say analysts
"This is a very dangerous situation for the dollar," said Hans Redeker, currency chief at BNP Paribas.
"Saudi Arabia has $800bn (£400bn) in their future generation fund, and the entire region has $3,500bn under management. They face an inflationary threat and do not want to import an interest rate policy set for the recessionary conditions in the United States," he said.
The Saudi central bank said today that it would take "appropriate measures" to halt huge capital inflows into the country, but analysts say this policy is unsustainable and will inevitably lead to the collapse of the dollar peg.
As a close ally of the US, Riyadh has so far tried to stick to the peg, but the link is now destabilising its own economy.
The Fed's dramatic half point cut to 4.75pc yesterday has already caused a plunge in the world dollar index to a fifteen year low, touching with weakest level ever against the mighty euro at just under $1.40.
There is now a growing danger that global investors will start to shun the US bond markets. The latest US government data on foreign holdings released this week show a collapse in purchases of US bonds from $97bn to just $19bn in July, with outright net sales of US Treasuries.
The danger is that this could now accelerate as the yield gap between the United States and the rest of the world narrows rapidly, leaving America starved of foreign capital flows needed to cover its current account deficit - expected to reach $850bn this year, or 6.5pc of GDP.
Mr Redeker said foreign investors have been gradually pulling out of the long-term US debt markets, leaving the dollar dependent on short-term funding. Foreigners have funded 25pc to 30pc of America's credit and short-term paper markets over the last two years.
"They were willing to provide the money when rates were paying nicely, but why bear the risk in these dramatically changed circumstances? We think that a fall in dollar to $1.50 against the euro is not out of the question at all by the first quarter of 2008," he said.
"This is nothing like the situation in 1998 when the crisis was in Asia, but the US was booming. This time the US itself is the problem," he said.
Mr Redeker said the biggest danger for the dollar is that falling US rates will at some point trigger a reversal yen "carry trade", causing massive flows from the US back to Japan.
Jim Rogers, the commodity king and former partner of George Soros, said the Federal Reserve was playing with fire by cutting rates so aggressively at a time when the dollar was already under pressure.
The risk is that flight from US bonds could push up the long-term yields that form the base price of credit for most mortgages, the driving the property market into even deeper crisis.
"If Ben Bernanke starts running those printing presses even faster than he's already doing, we are going to have a serious recession. The dollar's going to collapse, the bond market's going to collapse. There's going to be a lot of problems," he said.
The Federal Reserve, however, clearly calculates the risk of a sudden downturn is now so great that the it outweighs dangers of a dollar slide.
Former Fed chief Alan Greenspan said this week that house prices may fall by "double digits" as the subprime crisis bites harder, prompting households to cut back sharply on spending.
For Saudi Arabia, the dollar peg has clearly become a liability. Inflation has risen to 4pc and the M3 broad money supply is surging at 22pc.
The pressures are even worse in other parts of the Gulf. The United Arab Emirates now faces inflation of 9.3pc, a 20-year high. In Qatar it has reached 13pc.
Kuwait became the first of the oil sheikhdoms to break its dollar peg in May, a move that has begun to rein in rampant money supply growth.
Last Edit: September 21, 2007, 09:01:11 AM by Crafty_Dog
Re: Economic crisis?
Reply #1 on:
September 20, 2007, 08:02:42 PM »
Dispelling the 'Bin Laden' Options Trades
By Steven Smith and Aaron L. Task
8/30/2007 3:23 PM EDT
Updated from 7:07 a.m.
As if the mortgage-market meltdown wasn't enough to spook investors, some market players expressed concerns about unusual options bets that some observers have dubbed "Bin Laden Trades."
The blogosphere and options trading desks have been rife with speculation about these trades, which are unusually large bets that the market will make a huge move in the next month. Some entity, or entities, has taken a large position on extremely deep in the money S&P 500 options, both puts and calls, that won't pay off unless the market undergoes an extremely large price move between now and the options' expiration on Sept. 21.
However, Dan Perper, a Partner at Peak 6, one of the largest option market makers and proprietary trading firms, has confirmed that the trades are part of a "box-spread trade."
"This was done as a package in which the box spread was used [as a] means of alternative financing at more attractive interest rates" explained Perper.
Simply put, two parties agree to trade the box at a price that essentially splits the difference between current rates.
For example, the rough numbers would be that given the September 700/1700 box must settle at a value of 1,000 -- it is currently trading around 997 -- that translates into a 5% interest rate.
For the seller it is a way to borrow money at a slight discount to the prevailing rate, and for the buyer, it is a way to lend money at a low rate of return, but it's better than nothing at a time when others are scared and have painted themselves into a box (ha ha) because they have run out available funds.
Currently there are about 63,000 700/1700 boxes open. Perper expects that once the September options expire, you will see similar boxes established in the December series. As to why the September 700 put has over 116,000 contracts open, Perper thinks a good portion of that was created from the prior rollover when April options expired.
The positions in question had option industry experts perplexed to come up with a rational explanation, which are far from the best or most efficient way to profit from what would be outlier events.
Those concerned about the worst-case scenario recalled that large put contracts were placed on airline stocks, notably American, a unit of AMR and United Airlines, in the weeks leading up to the Sept. 11, 2001 terror attacks.
The first area of focus was that open interest September 700 S&P puts had such an unusually high number for such a low-probability trade. A put is a defensive bet that gives the holder the right to sell a security at a specified price, in this case more than 50% below the S&P 500's current level of 1463 as of Wednesday's close.
For comparison's sake, according to the Option Clearing Corp., the open interest in the July 700 strike some three weeks prior to expiration on July 20 was 790 calls and 7,300 puts, and the August 700 strike showed 1,250 calls and 14,800 puts prior to Aug. 17 expiration.
And the volume completely outstrips anything seen last September, when the S&P was around 1300, some 20% below current levels. In September 2006, the 700 strike had 600 calls and 7,500 puts, and no strike below 1000 had open interest surpassing 42,000 contracts, and that was the 900 puts.
The bulk of the September SPX trades in question have been put on since June 1. Similar bets have also been placed on the DJ Eurostoxx 50 index, which won't pay off unless the index tumbles nearly 25% to 2800, or below, by expiration on the third Friday of September.
The trades were noted in various online forums, where the worst case scenario is often the first conclusion: "Only an act of terrorism akin to 9-11 -- within the next four weeks -- could make these options valuable," writes one poster in the TickerForum chat room.
Others, such as the "Just Wondrin What Happened" blog, speculated that "China, reeling over losing $10 billion in bad loans to the sub-prime mortgage collapse presently taking place, is going to dump U.S. currency and tank all of Capitalism with a Communist financial revolution."
Furthermore, the TickerForum posters focused on the 65,000 contracts open on SPX 700 calls, ostensibly bullish bets that give the holder the right to buy the index at that level.
Given the fact that these calls are some 700 points in-the-money, and therefore have a delta of 1.0 -- meaning the options price moves dollar-for-dollar with the underlying index -- "the only advantage to owning them is it would be a more efficient and slightly less capital-intensive way to gain one-to-one exposure" to the S&P 500, Randy Frederick, director of derivatives at Charles Schwab, writes in an email exchange.
Frederick noted the Spyder Trust (SPY) and other index and exchange-traded products provide a much more liquid, efficient and higher-leveraged way to establish a bearish position quickly.
Plus, it's a lot easier to "hide" a big trade in the Spyders than the SPX options, which are only traded on the Chicago Board of Option Exchange and will be seen and facilitated by a tight-knit group of market makers.
Because there are about half the number of open contracts on S&P 700 calls vs. puts, it was also posited that these trades are part of a large strangle.
There is also open interest of 61,741 on the September 1700 puts. "Since this is only 11 contracts different from the 700 calls, it is possible that these two positions are making up a very large strangle, which could be either a breakout or neutral strategy depending upon whether or not it is a short strangle or a long strangle," writes Frederick. "If this is a short position, it may be anticipating the market will drop if the Fed does not cut rates as many expect" at its Sept. 18 policy meeting.
But such a strangle trade, with each leg being so deep in the money, would require a nearly 50% price move, up or down, to turn a profit.
Frederick said the position leaves him more confused than scared, although he wouldn't dismiss the frightening conclusion bloggers have come to. "It is also interesting that the anniversary of 9/11 occurs between now and the expiration of these options," he writes. "Perhaps there is speculation that another attack is in the works."
Brian Overby, director of education at TradeKing, a discount broker that caters to sophisticated option traders, suggested that this could be a box trade before Perper came forth.
Overby noted that the September 1700 strike has open interest of 73,745 calls and 61,741 put options. "This could be someone trying to create a box spread, which is a position composed of a long call and short put at one strike, and a short call and long put at a different strike. The position is largely immune to changes in the price of the underlying stock, and in most cases, is a simple interest rate trade."
So the upshot is there is an explanation for this very unusual configuration of open interest in the S&P 500 Index's September options, but it also shows jitters remain in this market.
Steven Smith writes regularly for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He was a seatholding member of the Chicago Board of Trade (CBOT) and the Chicago Board Options Exchange (CBOE) from May 1989 to August 1995. During that six-year period, he traded multiple markets for his own personal account and acted as an executing broker for third-party accounts. He appreciates your feedback; click here to send him an email.
Re: Economic crisis?
Reply #2 on:
September 20, 2007, 08:04:28 PM »
So, did whomever bought the put options know something? I guess we'll see by the close of the market tomorrow.
Re: Economic crisis over US dollar?
Reply #3 on:
September 21, 2007, 09:08:18 AM »
Scott Grannis is IMHO an outstanding economist (supply side orientation). I have followed his work for several years now and we correspond from time to time.
I begin my effort to answer your question with his recent comments on the dollar (pre-half percent rate cut):
"I think it is only logical that the euro will be used more and more
as reserve currency, and the dollar less. The euro economy is
already as large as the U.S. economy, so ultimately I would suspect
that large institutions with reserve holdings will hold about as many
euros as they will dollars. The dollar has been the currency of
choice because it has been the currency of choice for the biggest
economy in the world, but now that has changed. People have been slow
to move to the euro because it is still a young currency and the ECB
is still not fully tested. But given time that will change in the
euro's favor. That said, I don't see why that necessarily means that
the dollar has to fall further relative to the euro.
"Even when the dollar was THE reserve currency, it suffered huge
fluctuations in its value against other currencies.
"In any event, "reserve currency" status is not the be all and end all
for a currency. Central bank holdings of reserves amount to a handful
of trillions of dollars (held in a mix of currencies). Compare that
to the financial asset holdings of U.S. households which amount to
over $40 trillion, and the $10 trillion of liquid dollar-denominated
bonds. Compare also to the value of liquid, high-quality non-dollar
bonds traded around the globe, which stands at roughly $15 trillion.
Bottom line, central banks hold only a small fraction of the world's
dollar-denominated bonds, so their preference for one currency's
bonds over another are not all that important."
This was in response to my sending him this German article translated into English:
Greenspan: Euro Gains As Reserve Choice
Monday September 17, 8:07 am ET
Report: Former Fed Boss Says Euro Could Replace U.S. Dollar As
Favored Reserve Currency
FRANKFURT, Germany (AP) -- Former U.S. Federal Reserve chairman Alan
Greenspan said it is possible that the euro could replace the U.S.
dollar as the reserve currency of choice.
According to an advance copy of an interview to be published in
Thursday's edition of the German magazine Stern, Greenspan said that
the dollar is still slightly ahead in its use as a reserve currency,
but added that "it doesn't have all that much of an advantage" anymore.
The euro has been soaring against the U.S. currency in recent weeks,
hitting all-time high of $1.3927 last week as the dollar has fallen
on turbulent market conditions stemming from the ongoing U.S.
subprime crisis. The Fed meets this week and is expected to lower its
benchmark interest rate from the current 5.25 percent.
Greenspan said that at the end of 2006, some 25 percent of all
currency reserves held by central banks were held in euros, compared
to 66 percent for the U.S. dollar.
In terms of being used as a payment for cross-border transactions,
the euro is trailing the dollar only slightly with 39 percent to 43
Greenspan said the European Central Bank has become "a serious factor
in the global economy."
He said the increased usage of the euro as a reserve currency has led
to a lowering of interest rates in the euro zone, which has "without
any doubt contributed to the current economic growth."
As you can see Scott doesn't panic easily. This brings us to his comments of yesterday:
"The most incredible thing is that those who are supposed to be the dollar's stewards (the Fed and Treasury) have had absolutely nothing to say on the subject of the dollar approaching all-time lows against most major currencies. Benign neglect to da max is not helping things at all. Watch for more dollar weakness, but this is a potentially volatile situation since it won't take much to turn things around."
The Adventure continues , , ,
PS: From this morning: Stocks are higher in early action as traders get a reprieve from a falling dollar as the greenback is showing some signs of life, and a rebound in Treasuries, which is lowering yields, helping spread optimism on Wall Street. Volatility and volume is relatively heavier amid quadruple witching as commodity and option contracts rollover. Crude oil traders are taking a breather, pushing prices lower following a recent bullish surge in the commodity prices
Last Edit: September 21, 2007, 09:16:31 AM by Crafty_Dog
Re: Economic crisis over US dollar?
Reply #4 on:
September 21, 2007, 09:30:32 AM »
One more on this. Here's Brian Wesbury, who track record is amongst the very best in the land. It was written just before Bernanke's big cut.
September 18, 2007
Keep Fingers Crossed For a Hard Money Fed
By Brian Wesbury
Tuesday's meeting at the Federal Reserve is the most important in at least several years, but not because of the reason most people think. The markets and most pundits are asking whether the Fed will give a 25 or 50 basis point rate cut. But, we still hold out hope the Fed will do the right thing, which is not cut rates at all. Cutting rates, when they are already too low, will "lock in" inflation, force more rate hikes later, and puts the Fed's credibility as an inflation fighter at risk.
After all, the economy looks good. Using the latest data on sales, inventories, trade, and production our "add-em-up" forecast of real GDP growth remains at 3% for Q3. High frequency data, like initial claims for unemployment insurance are also painting a robust and resilient picture.
San Francisco Fed President Janet Yellen said last week that the U.S. economy has proven before that it can rebound quickly from financial turbulence and that "the effects of these disruptions can turn out to be surprisingly small."
In addition, conditions in the commercial paper market are improving rapidly, a good piece of news because so many analysts focused on problems in this market as a reason for the Fed to cut rates. Never mind that there is no historical link between commercial paper and future economic growth, and that problems were mostly isolated in the asset-backed marketplace.
It is true that overly-aggressive mortgage borrowers, lenders, and investors have issues that will take a long time to be fully worked out. But there are few signs that these troubles are dragging down the rest of the economy.
Some try to make it seem that the entire economy is at risk of drowning if the Fed, like an alert lifeguard, doesn't throw out a life ring (rate cut) to the credit markets. But, cutting the federal funds would be more like turning an entire cruise ship around, risking everyone on board, just to save one person.
We understand this desire, but it's an emotional decision not a rational one. This is a job for the Coast Guard, or in monetary policy language - the Discount Window. The Window is a specific tool designed to help particular financial institutions that are really having trouble. It does not cause general inflationary pressures, and it does not lead to a further misallocation of resources.
Measures of "core" inflation have fallen of late, but these measures are not useful when food and energy prices have been volatile in only one direction - up. Gold prices are over $700/oz. and the dollar is at a 15-year low. In addition, China's consumer prices are up 6.5% versus a year ago, a 10-year high. This is important because China pegs its currency to the dollar, which means its inflation rates are largely determined by the Fed. The evidence seems very clear. Inflation is visible in many markets. Nonetheless, because the conventional wisdom assumes a slowdown ahead, it ignores this inflation and recent strong economic growth. This seems like risky behavior to us.
During the past few days the stars seem to be aligning to strengthen Chairman Bernanke's resolve if he decides to resist rate cuts. Former Chairman Alan Greenspan opined that the winding down of globalization will put upward pressure on inflation in the years ahead. Meanwhile, the heads of the European Central Bank and Bank of England have both refrained from cutting rates and have publicly defended their positions, noting that staying the course now will diminish the threat and severity of future crises.
Now the ball's in Bernanke's court: will he go with the consensus if others at the Fed want to cut or will he stand his ground and do the right thing?
Brian Wesbury is the Chief Economist for First Trust Advisors in Chicago, IL.
Re: Economic crisis over US dollar?
Reply #5 on:
September 21, 2007, 11:37:23 AM »
Yet more: Ron Paul vs. Bernanke!
Re: Economic crisis over US dollar?
Reply #6 on:
March 17, 2008, 04:34:47 AM »
The Buck Stops Where?
March 17, 2008
In the credit market panic that began in August, we have now reached the point of maximum danger: A global run on the dollar that could become a rout. As the Federal Reserve's Open Market Committee prepares to meet tomorrow, this should be its major concern.
Yet the conventional wisdom -- on Wall Street and in Washington -- continues to be precisely the opposite. In this view, the Fed is "behind the curve" and needs to cut interest rates even faster and further than it has. Never mind that this is precisely the path the Fed has followed since August, yet the crisis has grown worse and now bids to tank the larger economy. Does it make sense to do more of what isn't working?
* * *
The Fed's main achievement so far has been to stir a global lack of confidence in the greenback. By every available indicator, investors are fleeing the dollar for other currencies and such traditional safe havens as gold and commodities. Oil has surged to $110 a barrel, up from under $70 as recently as September. Gold is above $1,000 an ounce, up from $700 in September, and food prices are soaring across the board. The euro has hit record heights against the buck, and for the first time the dollar has fallen below the level of the Swiss franc.
Speculators are adding to this commodity boom, betting that the Fed has thrown price stability to the wind in order to ease U.S. housing and credit woes. The problem is that dollar weakness is making both of these problems worse. The flight from the dollar has made U.S.-based investments less attractive, at a time when the U.S. financial system urgently needs to raise capital. And the commodity boom is translating into higher food and energy prices that are robbing American consumers of discretionary income. In the name of avoiding a recession, reckless monetary policy has made one more likely.
Meanwhile, and disconcertingly, we keep hearing new explanations for the virtues of dollar weakness. One of the most popular is that the increase in commodity prices has nothing to do with the dollar but is merely a change in "relative prices" -- commodities compared to other goods -- caused by surging global demand.
No doubt strong world growth explains part of the commodity price rise this decade. But the dollar price of oil has surged by some 60% since September, even as U.S. growth has slowed sharply. If the dollar had merely retained its value against the euro, oil would be in the neighborhood of $70 a barrel. Dollar weakness explains a large part of the oil price surge.
We are also told that the U.S. is merely importing inflation from the rest of the world, such as China. Import prices have surged nearly 14% in the last year, but that is mainly recycling the inflation that the Federal Reserve has inspired. Like other countries that have linked their monetary policies to the U.S., China has been importing inflation due to dollar weakness. Its official price level has tripled in a year, and it is now letting the yuan rise more rapidly against the dollar to slow that domestic inflation.
Kuwait has already dropped its dollar peg to stem its inflation, and other Persian Gulf countries may follow suit. These are all signs that the world is losing confidence in the Fed's commitment to price stability.
Another excuse is that a weak dollar is useful because it helps to boost exports, and thus reduces the U.S. trade deficit. Exports have certainly been strong, but exports in goods are being more than offset by the rising cost of oil imports. In January, the U.S. trade gap actually widened thanks to oil imports. In any case, rising exports won't comfort Americans whose standard of living falls due to rising import prices.
Then there is the "just deserts" school, which claims that dollar weakness is the inevitable result of America living beyond its means for so long. This road-to-perdition view is especially popular in Europe and the U.S. media. To believe it, however, you have to conclude that the world was willing to ignore the U.S. trade deficit for decades only to awaken in horror now.
The truth is that, as ever, the fate of the dollar is in our own hands. Inflation is always a monetary phenomenon, determined by the supply and demand for a currency. The supply of dollars is controlled by a monopoly known as the Federal Reserve, and at any moment the Fed can produce more or fewer dollars. The Fed can also influence the demand for dollars by maintaining a commitment to price stability, or it can reduce that global demand by squandering its anti-inflation credibility the way it is now. Once squandered, it is difficult to regain -- as we learned the hard way in the 1970s and 1980s.
The Bush Administration is also not helping confidence in the dollar. While President Bush is doing well to fight protectionism and higher taxes, his Administration continues to give the impression that it quietly favors a weak dollar. Yes, the official Treasury mantra is that it prefers a "strong dollar." But that mantra was the same when the dollar was strong and oil was $20 a barrel in the 1990s as it is now when oil is $110 and the dollar is weaker than at any time since the 1970s.
Last week Mr. Bush dared to wander from this script and told the Nightly Business Report that a strong dollar "helps deal with inflation" and rued its weakness against the euro. He was quickly reeled in by his advisers, and in his Friday speech at the New York Economic Club Mr. Bush reverted to the boilerplate language that investors now interpret as favoring a weak currency.
* * *
Which brings us to tomorrow's Fed meeting. The markets are expecting another cut of 50-75 points in the benchmark fed funds rate, and if recent history is a guide will immediately price into futures another 50-point cut down the road. The stock market may rally, until it once again decides that easier money can't remedy what is fundamentally a problem of bank solvency. That problem can only be resolved by financial institutions and regulators coming to grips with the losses, raising more capital to cushion the blow, and closing or selling those banks that can never recover. That will require a more aggressive, and pre-emptive, regulatory role for the Fed -- and that we would applaud.
What the U.S. and world economy don't need is a Fed that continues to insist that inflation expectations are "well-anchored" when everyone else knows they aren't. The Fed needs to restore its monetary credibility, or today's panic could become tomorrow's crash.
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