Government Rescue Plan Fails To Cheer Markets

The global markets had been optimistically awaiting Obama’s rescue plan, which had been passed by the House of Representatives two weeks back. In the expectation of  positive action by the government, some deal of risk aversion had abated that showed up in a brief positive run for the stock markets, both in the US and Asia. Since investors had been willing to take risk, the US dollar has eased off a bit. However, once the governmental announcements came in, the markets seem to have pooh-poohed the governmental plan and risk aversion set in again, with both the US dollar and the Yen firming up and stock markets moving down.

The jump in risk aversion can be attributed to statements of Treasury Secretary, Tim Geithner and the Fed Chairman Ben Bernake. The Fed Chairman’s statement suggesting that even though the Fed has pumped in billions of dollars worth of liquidity into the system via easing of monetary policy, it is no panacea seems to have been interpreted by the markets as ‘no quick fix’ for the gaping holes in the US financial system. The Treasury Secretary’s remarks a public/private investment fund that could soak up $ 1 trillion of distressed assets from American financial institutions also did not cheer the markets, with experts terming it as a band-aid approach. The goals set out by the Treasury Secretary include a comprehensive stress test of financial institutions, establishment of a public private investment fund and expand the Federal Reserve’s Term Assets Backed Securities Loan Facility.

Experts are of the opinion that the financial mess is so deep rooted that the only solution may be to nationalize institutions that are deemed too big to fail and throwing money at some assets is only as good as patch work. Experts feel that this band-aid approach could take years for the system to recover. The plan suggested by the Treasury Secretary was also viewed as a huge number, without any details of how it would be put into effective use. It is likely that the markets have begun to view it is throwing money at problems, without any real plan to address the issues at hand as was suggested of Bush’s bailout package.

In related developments, President Obama’s $838 billion fiscal stimulus package passed its second test, when the US Senate voted 61-37 in its favor. The legislation is now closer to implementation, with the House and the Senate having passed it. However both now need to reconcile their versions of the Bill so that it can move to the next phase and become legislation. This also does not have seemed to calmed investors, who pulled out of equities and hedged their risk in the safe havens of the US dollar and the Yen. While, both these currencies spiked up due to the re-emergence of risk aversion, the Yen itself rose against the dollar, perhaps due to a quick unwinding of carry trade.

All said and done, the US government does seem to have a plan, but it appears that it has been unable to clearly spell out the goal posts, which can result in a stoppage of the bleeding in the financial sector. It is likely that as the details of the governmental plan and the implications become clearer, markets may ease off, with investors moving back to securities. This would lead to a dip in the demand for the dollar and its value, and an upward movement in the stock markets.

6 comments

  1. britnla

    Can someone clear this up for me… Will this stimulus weaken or strengthen the USD…If so, what is the definition of weak or strong. Does a weak USD mean its costing someone from the US to go to Europe more money (getting less GPB for their USD)…another example: Last year the GBP/USD was around 1.90XX USD for 1 GBP…good for somone coming from the UK, but bad for someone from the USA going to the UK…Does that mean the USD is strong or weak…..????? Does the Stock market direction (DOW)going up or down have any effect on the Forex???

    Reply
  2. pipsprof.

    Thanks for all your carefully scripted articles,it helps a great deal in giving us newbies broader view of the currency market.I would appreciate it much if you will write an article on stocks,futures,commodities,and equities and thier relationship with the forex market.My background is not much of economics.Thanks once again if you can help me.

    Reply
  3. britnla

    Can someone clear this up for me… Will this stimulus weaken or strengthen the USD…If so, what is the definition of weak or strong. Does a weak USD mean its costing someone from the US to go to Europe more money (getting less GPB for their USD)…another example: Last year the GBP/USD was around 1.90XX USD for 1 GBP…good for somone coming from the UK, but bad for someone from the USA going to the UK…Does that mean the USD is strong or weak…..????? Does the Stock market direction (DOW)going up or down have any effect on the Forex???

    Reply
  4. pipsprof.

    Thanks for all your carefully scripted articles,it helps a great deal in giving us newbies broader view of the currency market.I would appreciate it much if you will write an article on stocks,futures,commodities,and equities and thier relationship with the forex market.My background is not much of economics.Thanks once again if you can help me.

    Reply
  5. Forex Gumpforexgump

    The effect of a stimulus package on the dollar is linked in a rather indirect way. If the stimulus package is well received by the market and investors, they will anticipate that economy is going to do better and will want to invest in stocks and other risky instruments. Fo this, they will need to witdraw their dollar denominated holdings in safe government paper and convert into various foreign currencies to pursue their invesment plans. Selling of dollars, should ordinarily lead to a fall in the dollar.

    This is likely to be the immediate impact of a stimulus package. In the long run, a stronger economy should automatically support a stronger dollar!

    Reply
  6. Forex Gumpforexgump

    The effect of a stimulus package on the dollar is linked in a rather indirect way. If the stimulus package is well received by the market and investors, they will anticipate that economy is going to do better and will want to invest in stocks and other risky instruments. Fo this, they will need to witdraw their dollar denominated holdings in safe government paper and convert into various foreign currencies to pursue their invesment plans. Selling of dollars, should ordinarily lead to a fall in the dollar.

    This is likely to be the immediate impact of a stimulus package. In the long run, a stronger economy should automatically support a stronger dollar!

    Reply

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