US Treasury securities and dollars less attractive

The big news out of the Federal Reserve today was, of course, the new website design! Weirdos.

Having cut its funds rate target to a mere 4.75%. Consequences? Multi-fold:

The Fed now has a third problem to deal with: They have become Wall Street’s bitch. They may find that’s a difficult condition to wriggle out from…

From the Big Picture – an assessment with which I’d be hard-pressed to disagree.

Wall street loved it. The Dow is already back at 13,750 and I’m sure our financial pages will be loaded with talk of the Magic 14,000 again, in no time. Meanwhile, behind the music:

The Australian and New Zealand dollars rose the most in almost a month after the U.S. cut its benchmark interest rate by a half-percentage point, boosting the appeal of the South Pacific nations’ higher-yielding assets.

The Federal Reserve cut its rate to 4.75 percent in a bid to protect the U.S. from sinking into a recession sparked by fallout from the country’s worst housing slump in 16 years. The currencies reached the highest in at least five weeks as investors were attracted to Australia’s 6.5 percent overnight cash rate and New Zealand’s 8.25 percent cost of borrowing.

The Fed rate cut also buoyed the currencies versus the yen as it gave investors confidence to resume carry trades, Gordon said. Both rose the most in almost a month against the currency of Japan, where the central bank today will keep its main refinancing rate at 0.5 percent, the lowest of major economies, according to a survey of economists by Bloomberg.

The improvement in market sentiment will probably encourage investors to “own risk again,” said Brendan Marsh, senior currency trader at Bank of New Zealand Ltd. in Wellington. The New Zealand dollar may rise to 73 cents today, he said.

Carry trades are borrowing in low-interest countries and lending in higher-interest countries, pocketing the difference. This is as we’ve discussed all along – capital moving to other currencies; simultaneously willingness to lend to the US goes down, due to the yield and, second, willingness to lend to the US goes down, because the US dollar is depreciating.

Someone will need to explain to me how “owning risk” (trans: speculating on currency with borrowed money) works out as a good thing (this returns us, again, to the point about moral hazard, Other People’s Money and the Fed being Wall Street’s bitch).

Now is also a good time for gold, it seems.

The Financial Times is carrying a story about declining inflationary pressure, thanks to, well, a slowing economy. However, that is still ex-food and ex-fuel – both of which they say are weakening, also. If they are, I haven’t seen any sign of it. As detailed yesterday, and more-or-less on an ongoing basis, there’s really no reason to expect food and fuel prices to be pressured downwards:

  • Oil (OPEC’s minor concession notwithstanding) is in ever tighter markets – irrespective of something like the US economy. Oil extraction and exports are basically in decline, but foreign demand is increasing.
  • Also grains (the EU’s “set-aside” concession notwithstanding) is in ever tighter markets – irrespective of something like the US economy. Crop yields are still down, at least until next year. Again, foreign demand is as strong as ever, also.
  • Thanks to the rate cut, the US dollar is down (still, faster, continuing – take your pick), which will mean increased fuel, import-food prices inside the US (even if the prices of food and fuel held steady.

I could just be a miserable, pessimistic bastard. At the moment, though, even CNN agrees with me, worryingly enough.


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