US Dollar Dives as the House Votes Down Bailout Bill - Black Monday Part 2?

[DailyFx]

The US dollar rocketed higher during the European trading session as European governments had to step in to rescue Belgium’s Fortis, the UK’s Bradford & Bingley, and Germany’s Hypo Real Estate Holding.



However, nearly every factor worked against the US dollar during the New York trading session, but the House of Representatives’ defeat of the $700 billion bailout bill, or the Treasury Asset Relief Program (TARP), took the cake as the biggest driver in the financial markets. Indeed, the news sent the US dollar down and Treasuries soaring on flight-to-safety, while US stocks plunged with the DJIA losing a whopping 777.68 points, marking the worst point decline ever, while the S&P 500 fell 8.8 percent, the most since Black Monday (October 19, 1987). The TARP bill failed in a 228-205 vote in this highly politicized event, but a motion has reportedly been filed for reconsideration of the vote, while House Financial Services Committee Chairman Barney Frank (D-Mass.) has said that they will “assess the market reaction to determine the next step.” Well, the markets have made their preference loud and clear. As a result, the representatives that voted against the bill due to their constituents’ concerns - Democrats and Republicans alike - will need to re-evaluate what they want to do if there is another vote. My view? This bill is likely to pass eventually, though the majority that voted against the measure may demand a few changes first. Is this Black Monday Part 2? Not quite. On Black Monday, the DJIA and S&P 500 lost over 20 percent of their value in a single day, and today’s moves didn’t come close.

What does this mean for the US dollar? Nothing positive, that’s for sure. Until this US bailout plan is passed, risk aversion pressures will likely weigh heavily on the US dollar. However, given the fundamentals on the other side of the coin – such as emerging recessions in the UK, Euro-zone, Australia, New Zealand, and Japan - there is potential for the greenback to recover. However, with fed fund futures now fully pricing in a 25bp rate cut on October 29 and a 66 percent chance of a 50bp reduction, it will be difficult to see a rally to the degree we saw from mid-July through early September.

Related Articles: DJIA Falls More Than 700 Points Intraday After US House Rejects Bailout Plan..., US Treasury Bailout Failure Leads to US Dollar and Fed Rate Forecast Tumble


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