Short dollar trades reverse

Earlier this year when financials puked (Bear Stearns and friends), euro and gold rose to record highs. Although there hasn't been any big institutional failure since Bear Stearns (maybe IndyMac counts), the pukage during the past couple months was arguably more severe (Fannie, Freddie, and friends). But did euro and gold rise to record highs? Hardly. I blame it on two things: moral hazard and dollar jawboning.

The market has accepted the notion that the government will bail out any major financial institution in the name of systemic risk. Of course, such bailouts merely prolong the inevitable, while robbing the tax payers. But for now, the government seems to be able to restore market confidence as they see fit, albeit artificially and fraudulently. It will only be a matter of time before the market acknowledges that the current credit crisis is beyond the reach of government bailouts, and that such bailouts only exacerbate the problem.

Last month, the government embarked on a chorus of dollar jawboning - a concerted effort (Fed, Treasury, and Exec. Branch) never seen before. Although it was a bluff, the dollar jawboning managed to keep the lid on euro and gold as stocks took a nose dive. Bernanke and Paulson must be giving each other HIGH FIVES right now, because just as euro and gold finally started to call their bluff, crude began a long-awaited correction and stocks began a long-awaited bear market rally; their timing couldn't have been any better.



Now the Fed has wiggle room to make even more bluffs. So for now, euro and gold must wait to see better days...most likely towards the end of Q3.