The double dip has come and gone. The dollar has plunged to new lows against many of its major counterparts. However, wading into the action, the most significant moves came on the part of the risk-related, carry pairs: USDJPY and USDCHF. Marking another remarkable milestone for the currency market, USDCHF dropped below parity for the first time in history. For the yen pair, 100 seemed a strong floor that would require a higher power (like BoJ intervention) to produce a significant break or rebound before next week's Fed rate decision.
In the end, all that was needed was the same driver that ushered the pair to its 12-year low over the past two weeks - risk sentiment. US policy makers made yet another concerted effort Friday to right the roiled credit markets. Just three days after announcing the new TSLF program, the Fed was prompted into action once again by the imminent collapse of one of world's largest investment banks. Bear Stearns CEO Alan Schwartz said in a statement this morning that his firm's liquidity position had "significantly deteriorated" from Thursday as investors made significant withdrawals on rumors the firm was facing a cash crisis.
Playing out much like the Fed's bailout of Long Term Capital Management back in 1998, Bear Stearns tapped the Federal Reserve of New York for temporary funding. And, since the broker does not have access to the discount window, the loan was actually made through JP Morgan on Bear Stearns behalf. This was certainly a necessary move as the collapse of a major investment firm like Bear Stearns in these fragile markets could trigger a global market crash. To further bolster confidence in the US markets, the Fed released a two sentence statement stating the bank stood ready "to provide liquidity as necessary to promote the orderly functioning of the financial system;" and President Bush reiterated his confidence in the US economy in a speech in New York. And, while the liquidity injection and assuring words may calm credit market fears, they also practically guarantee a 75 basis point rate cut (or greater) when the FOMC announces its policy decision on Tuesday. Fed funds futures have fully priced in 75bp of easing and set a 60 percent probability of a 100bp cut. If the Fed does lower rates to 2.00 percent, it will only be a mater of time before the market begins to realize the policy group is running out of options to salvage the economy and markets.
What's more, this attempt at securing the stability of financial stability has left the dollar out to dry. This has been the basis behind speculation that global central banks will collaborate for the first time in 13 years to rescue the dollar. The timing of such an effort will be critical.
