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A new liquidity crisis looming. Could a declining USD spark a currency crisis? (update 2)

Posted by Adrian on March 11, 2008

The term crisis is in it’s self a dramatic term, but what other term can be used when the banking sector is freezing up to the the point of it being completely frozen. In the world of business and competition it’s kinda funny the uneasy alliance the banks have had between each other (in regards to interbank lending). All looking for market share. But as the investment banks and commercial banks ran headfirst (risk management gone) into the debt markets and structured finance, derivatives markets; the banks all got hammed. In turn it shattered all confidence in the credit markets (hence the global credit crunch).

Now the rumour mill begins, especially when talk of a big bank (namely Bear Stearns) has insolvency issues; or hasn’t disclosed losses connected to the debt markets. This is bank to bank rumours. So with the credit crunch widening, rumours (or truths) continuing, it just proves the crisis of the liquidity and credit markets is serious, from CNNmoney:

“Wall Street was hit Monday with renewed signs of weakness in the financial services sector as rumors circulated that a number of large investment banks could disclose more writedowns.

Shares of Lehman Brothers (LEH, Fortune 500) fell nearly 6% after a report that the Wall Street bank is planning to cut 5% of its workforce, or about 1,400 jobs. Lehman will report first-quarter results next Tuesday.

A research report from a Citigroup analyst said Lehman could write down an additional $1.6 billion. The report also forecast a $3.2 billion writedown by Goldman Sachs (GS, Fortune 500), $2.9 billion for Merrill Lynch (MER, Fortune 500) and $1.2 billion at Morgan Stanley (MS, Fortune 500).

Bear Stearns (BSC, Fortune 500) stock fell more than 9% after reports that Moody’s had downgraded some of the brokerage’s corporate debt. A Bear spokesman said the reports were false.

“There’s no reason to buy right now,” said Ryan Larson, senior equity trader at Voyageur Asset Management. “It’s sell first, ask questions later.”

Now the currency crisis. As summarized last on morbius glass in ‘A new liquidity crisis looming. Could a declining USD spark a currency crisis? (update 1)’ ; with commodity prices booming (thanks to a dying USD) – will the commodity produces want to get more bang for their purchase? The middle eastern currency de-pegging rumour is also spreading, with the UAE assigning a committee to look at de-pegging from the USD. The last part of the rumour. The decision whether to de-peg or not will be at years end (2008). I would speculate that a decision, if one is made, will be sooner than later. Especially when Oil will hit $110+.

But all currency’s are volatile especially the EUR (overbought), and the relatively strong Asian currencies. As long as the credit crisis causes low yield borrowers to become risk averse; it’s hard to know what global currency is going to replace the USD (if any).


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