Forex Gump

It appears that the recent stock rally was more driven by expectations of a hopeful recovery than being based on any real recovery. The inevitable can be expected of any such surreal rally and the stock markets, after a brief positive spell, have been heading down again.

This isn’t kung-fu fighting, but it could get a little bit frightening – for the US dollar in the least. China seems to be indulging in another kind of kung-fu fighting in a new cold war style, while trying to assert, its new found economic dominance, into the world order.

We all know that the US dollar has traditionally served as a world reserve currency as also a hedge in times of economic uncertainty. For China, the US dollar has also served as a major investment destination in the form of US treasuries.

The global economic crisis, which battered investor confidence across the board, seems to have led to overpricing of the dollar, when in reality it was not backed by sound economic fundamentals.

The World Bank’s latest projections suggest that the global economy is all set to shrink in 2009, with major economies registering negative growth. Earlier it was expected that the global economy may register marginal growth, but the impact of the unexpected contraction in the Japanese economy seems to be leading to a situation, where the overall picture for the global economy is emerging to be gloomier.

The writing seems to have been on the wall. The bailout of AIG could lead to the belief that bad corporate performance by AIG was on the cards. AIG’s largest ever declaration of a quarterly loss in corporate history seems to have triggered a massive sell of stocks across America and Asia.

The Yen as we all know has served as a safe haven currency along with the US dollar. In times of economic turmoil, the Yen has tended to act as a hedge and as investors take shelter in its safe haven status, they drive up its value

At some point in our lives, we have imagined the feeling of a freefall…..it is discomforting. And now, we have the world’s second largest economy in the state of a freefall. So let’s all brace for the thud, before we hear the big ouch!

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.

If data and numbers can be trusted, then it is possible that the US recession may have seen its bottom in November-December of last year. A new report released by the Institute of Supply Management suggests that US non-manufacturing sector contracted at a slower pace in January.