Why is the dollar strong?
Bank X, a foreign bank takes $ deposits and invests proceeds in $ assets, sadly these turn out to be toxic. Bank X dumps the toxic assets, takes the loss. What do they have to do to make the depositor whole ?
BUY $
$ will gain against EUR and GBP, not JPY.
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October 2nd, 2008 at 8:51 am
An enlightening explanation.
Question : why will the USD not go up against the YEN but will do so against GBP & EUR ?
October 2nd, 2008 at 8:54 am
Because JPY banks have a much lower exposure to $ toxic assets than EU or UK banks.
October 2nd, 2008 at 12:21 pm
Assuming Bank X continues to accumulate $-based assets and does not warehouse the $-based deposits.
October 3rd, 2008 at 3:11 am
The unwinding of innumerable contracts are to be settled in USD. Fannie, Freddie, Lehman, and WaMu have their CDS settlements in the next 1 to 3 weeks.
Once the pressure eases it will return to a game of who is slowing down the hardest.
Keep in mind the $700bn TARP if passed is designed only to ease financial system strain and renew the Federal Reserve’s balance sheet in a way to give the next American Federal government a few months before passing a bailout aimed at solving present economic problems
America and Britain will both be weaker in 2 years time as the gimmick “first in, first out of a recession” grows tired just as the debts grow towards a credit downgrade
I realize your posting was just an off the cuff remark, but the settling accounts is much larger than the subset you described and that itself is a smaller story compared what is inevitably coming down the pike (say a circuit breaker on the NYSE come December?)
So I do apologize for using your blog to vent, but my patience grows thin as the greater public are completely overwhelmed by what has been there all along.
October 3rd, 2008 at 8:08 am
EvilHenryPaulson:
I am not sure the CDS settlings are a big deal for non-US banks.
I was just trying to explain in the simplest way a process that’s generally ignored and has been a big driver of $ moves in the past, for ex. latam debt in the 80s or asian crisis late 90s. Of course it is not the only driver but we are dealing with “forced” liquidation and everybody (in the market) knows it so the moves are so much more specacular that they appear at odds with “fundamentals” i.e lots of people are screwed because they operate under a different paradigm.
October 5th, 2008 at 4:56 pm
What is the exposure of those non-US banks to US$-denominated CDSes, jck? (And, can we back out a reasonable guess six weeks from now, from the FX flows?)
At the very least, we may see how many overseas banks bought Lehmann CDS “protection” from Lehmann.
October 5th, 2008 at 7:33 pm
Ken:
Nobody knows what “the exposure of those non-US banks to US$-denominated CDSes” is.
In Europe, there is a huge CDS market ( bigger than the US btw) and most of the trading in CDS by euro banks would be in in euro CDS, I don’t think they are in WaMu in any meaningful way, may be a bit of FNM and FRE, LEH would be a counterparty but they aren’t a mega player in Europe, that would be Deutsche, Barclays, UBS, mostly banks etc…I don’t think there is a $ trade because of the CDS market.
The trade is because of mass liquidation of $ assets that are underwater and the translated loss into euros gets worse as the euro loses value, this matters because we are talking big numbers, remember that the losses reported so far are higher than those of U.S banks, the size of the fed $ swap with ECB gives you a hint of the funding shortfall, we are taking around $200 bn if not more and that’s worth a pretty big $ move…
My point is that you can get a big $ move not just when foreigners buy US assets but also when they (banks) sell US assets at a big loss, because they still have to make depositors whole.