The dollar was mixed early Wednesday as talk that a revised bailout bill is heading toward the U.S. Senate for a vote met with concerns that the U.S. economy will enter a recession regardless.The dollar rose about one-half cent to $1.4036 versus the euro and three-quarters of a cent to $1.7730 versus the British pound, but fell about three-tenths yen to 106.10 versus Japan's yen.
Raising dollars vs. economic fundamentals
Currency Trader Andrew Resnick said the currency market is in a tug-of-war between raising dollars and U.S. economic fundamentals. "If the U.S. economic fundamentals were the gauge, the dollar would be falling because the U.S. is in poor shape," Resnick said. "But banks are hoarding cash and there's a global trend toward raising dollars, which is bullish for the dollar."
"It may seem strange to want more dollars from the country with the biggest financial and economic problems, but the dollar is still the world's reserve currency and in times of fear there is a flight to safety, which in the currency market is the dollar," Resnick said. He added that he was presently flat or had no open currency trading positions.
Resnick said two other factors were boosting the dollar, despite the prospect more U.S. government borrowing and/or spending from the revised bailout bill: 1) the fact that bank system problems are surfacing in Europe, and 2) U.S. banks accessing -- and holding -- dollars via the U.S. Federal Reserve's special facilities designed to maintain financial system liquidity.
Conversely, the yen has been able to hold its own versus the dollar as institutional investors and traders unwind carry trades -- borrowing the low-interest yen to invest elsewhere -- due to global economic slowdown concerns, Resnick said.
Also, the European Central Bank meets Thursday at 7:45 a.m. EDT (1:45 p.m. Europe continent time) to evaluate interest rates. Resnick expects the ECB to keep its benchmark short-term interest rate, the refinance rate, the same at 4.25%.
Resnick said it's "way too premature" to predict where the dollar is headed, longer-term. As mentioned, more U.S. Government borrowing historically means a falling dollar, but Resnick said he believes major central banks will not tolerate a plunge in the dollar that would further destabilize the financial system, and would intervene to support the dollar.
Forex & Economic Analysis: A word to the wise from trader Resnick: flat is the preferred position, for now. Those considering trading or investment positions in dollar hedges such as commodities and commodity-related plays should keep in mind they run the risk of being on the wrong side of the trade in the event major central banks intervene to support the dollar. The mantra remains: don't fight the Fed -- or the ECB, or the BOE, or the BOJ. And most assuredly, don't fight all of them combined.
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