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Wednesday, October 29, 2008 - American Dollar

Here is some information a client of mine passed along. I thought it may be interest to you.

Institutional investors and hedge funds are having to pay down some of the loans which they have taken out over the past few years. Previously these investors had been rolling over loans in the lower yielding currencies of the yen, swiss franc, and dollar in order to pick up the 'carry' between these low interst loans and their higher yielding investments. Now, due to the credit crunch, the lenders are not renewing these loans, and the institutional investors have to sell investments and buy back the yen, franc, and dollar in order to pay off the lenders. In addition to the flow of funds to pay off these bank loans, investors are also having to purchase dollars to make up for the losses which they are incurring on US$ based mortgage investments and credit default swaps.

When will this stop? This is very difficult to answer, as hedge funds are mostly unregulated and the credit default waps do not trade on an 'exchange' so it is almost impossible to try and gauge just how much of these swaps are outstanding. These swaps are contracts between two parties, and are not cleared on a common exchange. As mortgage backed securities have plummeted, holders of the credit default swaps have started collecting. The vast majority of these derivative cintracts are issued in US$, so when holders collect, the issuers have to pay off in US$, and sometimes haqve to sell investments in other currencies to raise the US$.

As long as the losses keep mounting, investors will continue to have to buy dollars. No one knows how long this will last and anyone who tells you they can predict these markets is delusional.

At some point the deleveraging will be complete and the markets will start trading back on fundamentals.
The fundamentals are not good for the US$, as we continue to increase debt and widen our deficits.
posted in General at Wed, 29 Oct 2008 14:48:15 -0700

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