The US dollar plummeted more than 2 percent against the euro on Monday, especially as shifting interest rate expectations start to move in favor of the euro and British pound.
Financial market news will likely remain the predominant driver of the markets in coming weeks, especially since it appears that massive consolidations in the banking sector are going to take place. The first sign? Goldman Sachs and Morgan Stanley were granted approval to become bank holding companies, and thus, will now be regulated by the Federal Reserve. Indeed, the days of the “big 5” investment banks are gone, as Lehman Brothers went bankrupt, Bear Stearns and Merrill Lynch were bought out, and now we have the transformation of Goldman and Morgan Stanley. The change will help the two survivors do two things: gain liquidity via deposits as financing will likely remain a problem in coming weeks, as well as put them in better positions to be acquired, to merge or to acquire smaller retail banks. On the other hand, they will also be subject to new capital requirements, additional oversight, and far lower profit margins. Nevertheless, it’s worth wondering if anyone will be seeing the sort of profits they’ve made in recent years, as asset deflation may serve as a threat for quite some time.
This has not stopped foreign banks from trying to get a deal on US banks, though, as Mitsubishi UFJ - Japan’s largest bank - announced a plan to buy a 10-20 percent stake in Morgan Stanley. Likewise, Nomura Holdings - Japan’s largest brokerage house - is paying $225 million for the Asian operations of Lehman Brothers. In what seems to be the norm nowadays, when the US hits bouts of financial distress, the government and financial institutions rely on foreign banks and sovereign wealth funds to save the day.
There is little in the way of US economic data scheduled for release in the next 24 hours, but traders should watch for testimony by Treasury Secretary Paulson and Federal Reserve Chairman Bernanke at the Senate Panel since it is sure to yield commentary on the latest credit turmoil. Furthermore, since Mr. Bernanke is speaking, his comments could potentially shake up US interest rate expectations. My fundamental [B]bias for the US dollar this week remains bearish, especially as the Treasury’s $700 billion plan could be widened from just mortgage-related assets to include everything from car loans to credit card debt[/B]. These sorts of assets were poisonous for the balance sheets of financial institutions, and will be similarly toxic for the US government.
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[B]Check out Daily Fundamentals in its entirety for analysis and outlooks on the US dollar, euro, British pound, Japanese yen, and the commodity dollars.[/B]