In an earlier post we mentioned that the US currency appears to appreciate in the face of bad news – a bad sign for economic stabilisation. After saying this, I noticed two articles up on bloomberg:
According to one article the US$ will fall because of the government will have to increase debt in order to fund the bailout. According to the other article, demand for US Treasuries is picking up because lenders are scared to take on risk.
As a result, the fact that the US government needs more funds will lower the dollar – yet since demand to be the lender of these funds is on the rise, we have a countervailing factor.
Add this together and we can see that either the “fear of government debt” is currently the dominant factor, or the markets perception of global credit risk has fallen (given the bailout and corresponding drop in the US$). Which factor do you think is driving it? Personally I think its the market perception of global credit risk.
Update: Could we be reaching a tipping point where this type of currency behaviour no longer makes sense – maybe.