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Forex Blog - Dollar Rally Fast and Furious as Authorities Ban Short Selling and Propose Rescue Plan

Dollar Rally Fast and Furious as Authorities Ban Short Selling and Propose Rescue Plan Last Updated 9/19/2008 6:25:41 AM EST (GMT +5)

Top Stories

• US Treasury to work with Congress on plan to buy up illiquid assets

• Most G-7 stock markets ban short selling on financial assets

• Equity markets rally as much as 8% on massive short squeeze

• Cost of plan possibly $500 Billion

• Longer dated depo demand for dollars continues to spike with spreads 3.5% -4.25%

• Dollar demand creates a rally against majors

• Oil remains near $100/bbl

• Gold off $30 but remains well above $800 oz.

Overnight Eco

• NZD Current Account -3.91B vs. –3.42 projected

• NZD Credit card spending up 2.5%

• EUR German PPI –0.6% vs.-0.4% expected

Event Risk on Tap

• North America open barren of economic data today

Price Action

• USD/JPY soars 200 points as risk aversion mitigated by US news

• AUD/USD performs best as carry demand drives it above 8100

• GBP/USD below 1.8000 as dollar flows return

• EUR/USD: weighed by forced selling of Lehman positions but buyers under 1.4200

Dollar Rally Fast and Furious as Authorities Ban Short Selling and Propose Rescue Plan

Global equities staged a fast and furious rally in the wake of the announcement by US fiscal authorities last night that they will create a rescue vehicle to acquire illiquid MBS securities from US financial institutions to ease the credit crisis that saw capital markets this week grind to a virtual halt. Furthermore, both the SEC and the FSA in London as well as some EZ regulatory agencies announced a temporary halt on short selling of certain financial sector equities setting off a massive short squeeze in global equity indices with some like FTSE 100 trading up an astounding 8% higher by midday London session.

In currencies the net result was an immediate flow to the dollar as the greenback benefited from both the massive reduction in risk aversion and speculation that demand for dollar denominated assets will skyrocket once US issues what is anticipated to be more than $500 Billion worth of Treasury Bills to fund the rescue vehicle. Dollar’s gains were most pronounced against the yen as the relief rally in equities pushed USD/JPY 200 points higher from the New York close with the pair peaking at 107.75 in early European trade.

Meanwhile the EUR?USD reversed all of its gains over the past 24 hours as the combination of dollar demand ahead of the rescue package and reported forced l unwinding of Lehman positions pressured the pair all night long. Nevertheless the unit found good support under the 1.4200 handle and we continue to believe that unless the pair breaks below 1.4000, it has now carved out a near term bottom and will likely stabilize at these levels.

With no economic data on the calendar today, FX flows will no doubt be driven by US stock market action. It will be interesting to see if US equities will be able to match the euphoria set by Asian and European markets. Undoubtedly, the ban on short selling will create an artificial bid for US equities today and if the Dow posts another 400+ day USD/JPY could easily blow through the 108.00 level and perhaps even challenge 109.00. However we expect the euro to hold 1.4100 support even in the wake of this massive dollar buying as bargain hunters come to the fore and roll rates return to normal as money markets start to function again.

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About The Author

Schlossberg has more than 20 years experience financial trading on Wall Street. His daily currency research appears in numerous newspapers worldwide and Schlossberg serves as a regular contributor to CNBC's Squawk Box and Bloomberg radio and television. Read more >>

DISCLAIMER: This forum and the information provided here should not be relied on as a substitute for extensive independent research before making your investment decisions. Global Forex Trading is merely providing this column for your general information. The views of the author are not necessarily those of Global Forex Trading, its owners, officers, agents or employees. In addition, any projections or views of the market provided by the author may not prove to be accurate. Global Forex Trading and Boris will not be responsible for any losses incurred on investments made by readers and clients as a result of any information contained in this column. Global Forex Trading and Boris do not render investment, legal, accounting, tax, or other professional advice. If investment, legal, tax, or other expert assistance is required, the services of a competent professional should be sought.


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