Freddie, Fannie and Ike send the US Dollar lower

Freddie, Fannie and Ike send the US Dollar lower

Not the latest chart topping sensation but moreover recent drivers that may see the US dollar reverse recent trends. Markets reversed sharply and gapped overnight after US Treasury announced a four-part plan to rescue Fannie Mae and Freddie Mac over the weekend to save the US housing markets. Both GSEs will be put into conservatorship. The details of the rescue package are not straightforward. Portfolios of both GSEs are allowed to increase modestly through to end of 2009, followed by annual 10% reduction starting in 2010 with the Treasury allowed to buy as much as $1b of senior-preferred stock in each company to maintain positive net worth. An unlimited lending facility will continue to be provided to both GSE’s and the short-term funding will be lent at a rate of Libor plus 50 basis points. Fed Bernanke said in a statement that he supported the Treasury plan as these are “necessary steps” to strengthen the U.S. housing market and promote stability in the financial markets.

The dollar maintained its bullish momentum on Friday despite disappointing payroll data. Recent price action suggests that recent trading has been guided by cross-asset money flows i.e. investors closing out of comparatively risky investments – stocks, and moving funds into cash; considering the interest rate outlook for 2009 it make sense that the cash choice was the US dollar.

The news from the US was welcomed by stock markets overnight and early activity this morning has the FTSE100 index already up 3.80%. The USD sold off on the news however key near term levels appear to be holding; we would need to see a break of these levels for a confirmation of a reversal in recent trends.

Adding to downward pressure on the dollar, crude oil prices pushed higher above $108/barrel as Hurricane Ike gathered strength en route to the Gulf of Mexico. Refineries in the area account for 26% of US oil production.

The contents of this report are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. Currencies Direct cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

The contents of this report are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. Currencies Direct cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.