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Currencies Rally on Obama's Plan to Save Banks

Wed, Jan 28 2009, 23:17 GMT
by Kathy Lien

GFT

Currencies Rally on Obama's Plan to Save Banks

Investor confidence has improved this morning, driving currencies higher.  Traders are quietly moving out of US dollars and back into higher yielding currencies thanks to news that President Obama is considering creating a bank that would absorb toxic assets. On Friday, we talked about the 3 Big Threats to the US dollar this week and one of them was a bad bank plan.  A bad bank plan is positive for the markets because it shifts low grade or bad assets to a new bank, leaving them with only high grade assets.  This helps to improve the bank's balance sheet and hopefully makes the banks more attractive to investors. More immediately it squeezes shorts on financial stocks, driving equities and currencies higher. 

The house is set to vote on Obama's stimulus plan this morning which is nearing $900 Billion.  President Obama isn't wasting any time at all and is making the most of his first 100 days.  With the Federal Reserve expected to leave interest rates near zero this afternoon (FOMC Preview), fiscal stimulus is the only thing that investors have to cheer about.  In the past 50 years, stocks have ended higher after the first 100 days of a President's term approximately 70 percent of the time.

Although we are optimistic about what President Obama can do for the economy, he has an exceptionally difficult task before him. The unemployment rate is on the rise and if more people continue to lose jobs, delinquencies and defaults will rise, turning some high grade assets into low grade ones creating a toxic cycle that may be difficult to reverse.  What Americans need are more jobs and unfortunately a bad bank plan does not solve that problem. 

Published on  Wed, Jan 28 2009, 23:19 GMT