Forex Financial
Trading Forex – financial bailout and the dollar
Everyone who follows the news even surface would have heard of the terrible chain financial developments in the United States. More and more investment and banking companies are going bankrupt or are being threatened by the spread of the credit crisis. This is a side effect of excessive lending practices during the housing market extended bull, which came to an end as a "bursting bubble" more than a year ago.
Now companies are increasingly being found in possession of securities directly linked to mortgages issued during that period. More and more houses going into foreclosure and lose value, an increasing number of financial instruments are rapidly becoming not perform, or worthless all. Companies holding them are experiencing losses into the billions of dollars. Some of them are becoming insolvent.
Such was the case with Washington Mutual, which was captured by federal authorities and are sold at a bargain price to JP Morgan Chase. Washington Mutual set a sad record becoming the largest bank ever to fail in U.S.. But not the only one lately. So far the crisis has claimed 12 banks, investment banks and even companies insurance, such as industry giant American Insurance Group.
To date the U.S. Treasury real disaster was averted by the step by step and take over failed institutions or provide financing to keep them alive, by lending to other companies for the purchase of weakened rivals. The intervention has cost Treasury hundreds of billions of dollars, including $ 25 million bailout of Bear Sterns, $ 100 million each to Fannie Mae and Freddie Mac, $ 85,000,000,000 for AIG. This list goes on.
Now FED is asking Congress additional $ 700 million to rescue the financial industry at large through the establishment of a market for mortgage-backed securities. Federal authorities are willing to buy instruments for most companies at risk. That would establish some form of pricing guidelines for all other values, which enables all holders of these tickets to start trading in them again, potentially lowering the risk of owning them.
No one really knows whether this will be enough, but the price of that action will be amazing. With the money already and spent the funds requested, the total bill will certainly surpass $ 1 trillion by a wide margin. This would be a sign of the new wave of loans by the Treasury, which lasted for years and push the total debt level in the file and the new level.
Dollar loss in value while all this was unfolding, and is likely to continue until Congress of slides of works of detail of this massive infusion of money. After that it will take some time to see if EDF is taking measures are taking effect. U.S. dollar probably remain under pressure during this time. One would expect this to continue through the memory of 2008.
To finance the increased debt levels, we expect to see interest rates go up in dollars, which would play Treasuries more attractive. Combined with economic slowdown in the rest of the world, this could be very optimistic on the dollar going into 2009. This is just the case if the interest rate increases made in a slow, measured, and not because of any panic in the market. This particular scenario is compatible with very long term charts dollar.
We should be looking forward to what comes out of the chambers of Congress. Once the funding is granted, shall be the financial authorities to prove it is money well spent. If even half works as well as promised, we should see steady appreciation of the dollar in 2009, and perhaps a little more.
About the Author
Mike P. Kulej is a Chief Forex Strategist for Spectrum Forex Llc. He specializes in mechanical trading systems as explained on www.spectrumforex.com . Spectrum Forex LLC offers numerous services to individual traders. He also publishes trading blog www.fxmadness.com . With questions and comments e-mail him at kulej@spectrumforex.com.
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