The case for a bullish DOLLAR has certainly been made in NOTES FROM UNDERGROUND during the past five months. Since the Chinese walked away from a potential bid on 25 billion of euro-denominated Greek debt, the pressure on the European debt markets has led to a reduction in EURO-based assets by large private investors, pension funds and even some central banks. The overall effect has been a further deleveraging of the global financial system and thus the increased fears of global deflation taking firm control of the credit markets.
So far a new bout of liquidity injections have stemmed the onslaught of a second Lehman but markets are nervous to say the least and DOLLARS and YEN have regained their haven status. We have to raise an issue though about the potential hazards of a too robust DOLLAR/bullish outlook. As we know, the FED will now be on hold for longer than previously thought as the EURIBOR and LIBOR markets are suffering under the weight of counterparty risk. As a key to recent market events, we would advise watching the four front contracts of the IMM EURODOLLAR interest rates as they seem to be the new indicator of risk dynamics. The S&PS stopped going down today as the SEPTEMBER 10 EURODOLLAR contract found support and rallied to close higher after an early fall of 15 basis points in futures terms. THE EURO currency also staged a late rally as it appeared that pressure was easing in the inter-bank credit markets. We remind our readers that markets are dynamic and its underlying fundamentals always in motion which is why we all need to use technicals to ascertain the best risk profile.
The DOLLAR is also going to be burdened by the U.S.’s wavering on international issues. The sinking of a South Korean warship by the North was an act of war. Now we respect SEOUL’s sovereignty and the fact that it is their decision on how to deal with the North Koreans but the soft tone presented by the U.S. foreign policy bureacracy will cause alarm amongst allies the previously believed in the credibility of U.S. defense treaties–think of Taiwan, Japan, Eastern European nations, Israel and many others. If the sinking of a warship is not worthy of a sharp and immediate response of some kind, what do the world’s mischief makers have to fear? How far do they have to push before the U.S. comes to stand by their friends? The long-term effect will cause the U.S. to lose its international standing and the DOLLAR will follow, for our currency is at best a promissory note. This is not a call to arms but rather some real action to remind the drama queen LIL KIM that there is a price to be paid for as a global miscreant. Just one more reason that the world is nervous and so unbalanced. The paper tiger had better understand its paper currency and its role in the world, for we will not always have Athens.