More Liquidity Leads to Falling Dollar and Rising Oil Prices

by BigT | July 30, 2008 at 04:29 pm

287 views | 2 Recommendations | 0 comments

What's wrong with our economy? Well, in historical terms, not really all that much. But we do have some problems. The most pressing concern right now is that the dollar's value is falling in comparison to other countries' currencies. Why? All I know is that it doesn't help when you have a Federal Reserve that continuously pumps more liquidity into the economy.

The Federal Reserve announced earlier today a series of measures to enhance and improve the current set of tools it uses to deal with the unique liquidity problems which have threatened financial stability since about this time last year.They have extended the Primary Dealer Lending Facility and the term Security Lending Facility through January 2009.

They will introduce auctions of options on $50 billion of draws on the TSLF.

They will introduce an 84 day TAF to complement the 28 day TAF.

They will increase their swap lines with the ECB to $55 billion from $50 billion.

The next thing I know I read this story about the dollar, which has been increasing in value recently.

The US dollar’s rally against major currencies from Tuesday, as a result of better-than-forecast US consumer confidence, was carried over to Wednesday, albeit at a slower pace. EUR/USD dipped to another 1-month low of 1.5520 today while USD/CHF rose to a 6-week high of 1.0520 after the release of an unexpectedly positive jobs report from ADP which showed that private employers added 6000 jobs last month, versus an average forecast cut of 60,000 jobs.

This surprising outcome is leading many to think that maybe, just maybe, this Friday’s release of the government NFP report won’t be as bad as forecast. The estimate is for a cut of 75,000 jobs in July, following a decline of 62,000 in June. The dollar later gave up some of its gains when oil shot up $5 after US DOE oil inventories data showed crude inventories fell unexpectedly. Nymex crude oil closed at $126.77 after falling to $120.42 on Tuesday, the lowest level since May 6.

Another factor that could have capped dollar’s gains for the moment has been a Fed announcement Wednesday that it will extend its emergency credit facilities, established in March, through January 30.

So here's the situation as far as I can tell. Lenders and other financial institutions used silly levels of leverage to increase their gains a couple of years ago. The bottom fell out of the housing bubble and those same financial institutions had to have fire sales to cover their leveraged losses and have since stopped using as much leverage. Now these financial institutions don't want to lend money to anyone but those with the lowest risk.

Basically, the way I see it is that our nation's most pressing concern is the fact that our dollar has lost value against most other currencies throughout the world. In turn this makes everything we import (oil) more expensives, allows foreign nations to come in and buy our assets (our companies) at a steep discount, and we have to live through rising inflation. And why would anyone want to borrow a large amount of money to buy a house with a falling dollar, which leads to falling home prices?

What the Fed needs to do is to restore stability to the dollar. Raise rates a little bit or at least make it clear you aren't going to make more cuts (which includes giving longer payment periods). Prove to the Street that you are serious about battling inflation and restoring value to our currency. That will help more than another $50 billion worth of liquidity.

0 See all footage | View Slideshow

Share: email story | add to any | Digg | facebook | stumbleupon