"Because the currency markets months ago had already factored-in or priced into the dollar some form of U.S. Government takeover of both Fannie Mae and Freddie Mac," Andrew Resnick, currency trader, told BloggingStocks Monday.
The U.S. Treasury will buy as much as $200 billion in new, senior, preferred stock in Fannie (NYSE: FNM) and Freddie (NYSE: FRE) as part of its takeover of the government service giants, whose business models ran into trouble as the housing boom ended and mortgage defaults soared. The large, potential increase in government spending/borrowing would appear to be unquestionably dollar-bearish. Not so, says Resnick.
"The bailout is going to cost the U.S. Government and taxpayers more money, there's no doubt about that. But if it represents the first step toward reaching a bottom in the housing mess and at the same time stabilizes credit markets, that would be dollar bullish," Resnick said. "And that's the currency market's view at the present time."
Indeed, the dollar showed little signs of a collapse Monday. After dipping early Monday morning in Asia, the dollar firmed and was up about one-half cent to $1.4430 versus the euro, and added three-tenths of a cent versus the British pound. The dollar was rose about 1 yen to 108.52 versus Japan's yen and rose 1 cent to $1.1290 versus the Swiss Franc.
Fannie and Freddie own or guarantee about $5 trillion in U.S. mortgages, or about one-half of the U.S. residential mortgage market.
Oil, GDP also will determine dollar's value
Still, Resnick cautioned that investors / traders should not assume the dollar will rally in the quarters ahead, solely on the back of the U.S. Treasury's action with Fan-Fred.
"The U.S. Treasury's action takes a considerable portion of 'the unknown' out of the market, and the markets view that as dollar positive, but the U.S. Treasury's Fan-Fred authority expires at the end of 2009. It will be up to the new [U.S.] president and Congress to determine what role Fan-Fred plays in mortgages and the recirculation of mortgage capital back to the market, so that's still a big unknown," Resnick said. "Also, remember that oil prices, the trade deficit, and the growth rate of the U.S. economy are other major factors that'll help determine the dollar's value and direction. So Sunday's action by the [U.S.] Treasury represents only one step, but a big one, toward correcting the problems that have driven the dollar to such low levels."
Resnick added that he is presently flat, or had no open currency trading positions.
Forex / Economic Analysis: Trader Resnick's observations on the multiplicity of factors affecting the dollar should not be lost on investors / traders. The price of oil, and GDP growth rates in the quarters ahead in the U.S. and Europe will have just as much to say about the dollar's direction as the U.S. Treasury's Sunday decision.
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Reader Comments (Page 1 of 1)
9-08-2008 @ 11:29AM
.. said...
Says Richard Behar, President of Capitol Clothing Corp., a Miami, Florida manufacturer of Boys Apparel under the brands of Little Baron and Capitol Boys, " With time the U.S. Dollar will again be the strongest currency" .