Thursday, 5 March 2009

Possible stampede for US dollars

UDN, which takes an inverse position on the US dollar against a basket of major currencies, is approaching previous lows and will be worth monitoring over the next couple of sessions.

I would not suggest taking a position until the impact of today’s announcements from the European central banks and also the payroll number for the US has been at least partially digested by traders.

Continued strength in the US dollar, in other words further price erosion in the UDN inverse tracker would suggest that a more eponymous move lies ahead for the US Currency.

For a rather apocalyptic view of what could turn out to be a stampede for dollars the following article is worth reading. Here are a couple of excerpts

European banks face a US dollar “funding gap” of almost $2 trillion as a result of aggressive expansion around the world and may have difficulties rolling over debts, according to a report by the Bank for International Settlements.

The report, entitled “US dollar shortage in global banking”, helps explain why there has been such a frantic scramble for dollars each time the credit crisis takes a turn for the worse. Many investors have been wrong-footed by the powerful rally in the dollar against almost all currencies, except the yen.

British banks had accumulated a dollar "funding gap" of $300bn by mid 2007. The latest BIS data up to the third quarter of 2008 shows that this exposure has been trimmed by “deleveraging” but it still largely hanging over the UK financial institutions.

Swiss banks had a funding gap of $300bn at the onset of the credit crunch, an extremely high figure relative to Swiss GDP. German banks were $300bn short, and Dutch banks were $150bn short. Belgian and French banks were neutral.

The BIS said the total “funding gap” in dollars was around $2.2 trillion at the peak, when money market liabilities are included. This had fallen to around $2 trillion by the time of the Lehman Brothers collapse. The data is collected with a lag but it appears that there are still huge dollar liabilities to be covered.

Simon Derrick, currency chief at the Bank of New York Mellon, said the implications are obvious. “The global bullion of the last eight years was funded on dollar balance sheets, so the capital destruction we’re seeing leaves banks starved for dollars. Dollar is clearly going to appreciate a lot further,” he said.

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