US Dollar rising dramatically

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The U.S. Dollar is rising once again. As the realization kicks in that the U.S. will not be alone in its economic struggles, currency traders are making major bets that interest rates will fall outside of the U.S. across the board. The British Pound, the Euro and the Canadian Dollar have all been losers. The Japanese Yen is holding up rather well.

The U.S. has led the charge in cutting interest rates, but as the global economy slows other countries are expected to cut interest rates a lot more. Interest rates are much higher in Australia, New Zealand, the UK and the Eurozone, giving these economies more room to cut. As a result, currencies in those areas are falling.

Benchmark Currencies

In September, I speculated that currency moves would cause damage to hedge funds taking large currency bets. We are now seeing damage to speculators. The Australian and New Zealand Dollars have already fallen precipitously versus the U.S. Dollar, leading the Hong Kong-based financial trader Citic Pacific to take $2 billion in rogue trading losses. Now, we can see monumental moves in the Pound, the Euro and the Canadian Dollar (see red circles in chart above). More fallout is likely.

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The only currency that is holding its own is the Japanese Yen. Marshall Auerback believes the U.S. Dollar and the Japanese Yen are both going higher for different reasons.

The Dollar is rising in part due to an unwind of dollar-denominated debt that international financial institutions are unable to refinance in this credit environment. This is one reason that the Fed has loaned unlimited funds in U.S. Dollars to the Swiss Central Bank and the European Central Bank.

The Yen seems to be rising because of the unwind of the “carry trade” as Japanese retail investors realize that interest rate convergence is happening and they can no longer invest abroad safely at high rates of interest.

Whatever the reasons for the recent moves, they are dramatic and someone somewhere is nursing some very big losses.

Related articles
Currency Bets Gone Bad Hit Companies in Developing Economies – Naked Capitalism
Citic Pacific Under Investigation After Currency Loss – Bloomberg

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