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Daily Analysis

Amid the background of a week with the worst performance for global equity markets in history, the Dollar continued to post large gains against the EUR and GBP while the JPY saw enormous gains against the Dollar.

Last Friday many analysts were forecasting a dramatic change in the USD over the weekend following the G7 and G20 Summits. Not surprising many, these Summits did create a change in the market. Although described by some as “underwhelming,” the statements issued after the G7 Summit were enough to move the market. A major development later occurred in the Euro-Zone in the form of a unified commitment by financial chiefs to prevent large financial institutions from failing.

Last week, the 390 pips gained by the USD against the EUR could largely be attributed to the instability of world markets. The financial crisis currently taking place is affecting every major economy and particularly US equity markets, but investors believed it was affecting the U.S. less as the government had at least made the efforts of presenting, and approving, a financial rescue plan. The lack of such a plan in other regions led to a flight to safety in the Dollar. As a result, banks were hoarding USD and selling off other currencies. This increased the demand for the Dollar, helping it rise to a 15-month high against its currency counterparts. Now that a similar rescue plan has been approved in Europe, we see investors buying up European currencies and returning en masse to carry trades. This has created a reversal to the USD’s up-trends which it experienced last week.

At last the European banks joined hands in an effort to save their financial system. The oft-stated difficulty the Euro-Zone faces is a lack of cooperation among the various central banks. After seeing the light this weekend, following the G7 and G20 Summits, as well as a meeting of the 15 nations making up the European Monetary Union, the European financial chiefs have announced an agreement to jointly stabilize the European economy. This effort will be done by propping up credit markets with tax-payer money as well as bailing out any major financial institution on the verge of collapsing. The idea is to prevent a catastrophe like the failure of Lehman Brothers Holdings Inc. in the U.S.

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