Flight-to-safety triggered major gains for the US dollar on Friday, as volatility remained exceptionally high in the market.
In fact, the CBOE’s VIX Index surged to a record high as Moody’s Investors Service said that they may cut their rating on Morgan Stanley, stoking already-high anxiety amongst traders about the health of financial and serving to create the perfect storm to spur selling in the equity markets. Indeed, S&P 500 experienced its worst week since 1933 and the DJIA had its worst week ever, and given these massive losses, the New York Stock Exchange and Nasdaq Stock Market will reportedly try to impose a temporary ban on short sales for individual stocks that falls at least 20 percent for the following three days. As usual, these solutions are very short-sighted, and may not be beneficial in the long-term. The issue is trust between counterparties, and banks are simply hoarding cash because they don’t know if the banks they’d normally lend to will be the next to fail. Trust needs to be restored before the markets can recover, and many will be looking toward the Group of Seven nations to help improve this.
Indeed, the G7 met today in Washington, but one official said that they were unlikely to adopt a commitment to guarantee loans between banks, like the UK has done. Meanwhile, there are concerns that any statement the G7 makes will not be sufficiently strong to restore confidence in the markets, as Italian Prime Minister Giulio Tremonti refused to endorse a draft, saying that it was “too weak.” As a result, these may leave Sunday’s meeting of European Union leaders in Paris as a more important event. Since the start of September, Sunday has been one of the most important days in terms of financial market news. The announcements that Fannie Mae and Freddie Mac were being nationalized, that Merrill Lynch would be sold to Bank of America, and that Lehman was teetering on the brink of bankruptcy all fell on a Sunday. The pressure is on, but if the G7 or EU comes out with a statement that leads the credit and stock markets to stabilize a bit, the US dollar could see a sharp reversal lower. Check out Daily Fundamentals in its entirety for analysis and outlooks on the US dollar, euro, British pound, Japanese yen, and the commodity dollars.