The Dollar Braces For Fed & G20 Meetings

The dollar slid quickly in overnight trading as investors awaited today’s decisions from the Federal Reserve and the upcoming G20 summit in Pittsburgh.  Meanwhile, equity markets surged and oil edged up after a slight trimming in Monday trading.

The euro hit a one-year high against the battered dollar rising to $1.48 and closing in on the vaunted $1.50 threshold.  Most investors feel the euro will top the $1.50 mark by the end of the year.  In overnight trading, traders took advantage of the dollar’s Monday success and a lack of liquidity as the Japanese markets remained closed for the holiday.  The dollar hit a 14-month low against the Swiss frank settling at 1.0248 franks.  The euro was up 0.8% at the close.

Against a basket of currencies, the dollar .DXY fell 0.8% and approached the one-year low of 76.1 before settling at 76.155.  Investors expect the Federal Reserve to stay the course and continue stimulus spending until housing settles and unemployment joins the recovery.  The index has trimmed more than 2% in September as higher yielding currencies continue to attract investors.

Overnight, the dollar fell 1% against the yen to 91.15.  The New Zealand dollar jumped 2% to $0.7210, a 13 month high against the dollar.

The Fed Announces Interest Rates Today

Amid signs of growing tensions between the Federal Reserve, the Treasury and the FDIC, the Fed commences two days of meetings that will have implications on interest rates, the dollar and the trajectory of the recovery.  There appears to be disagreement among the Federal Reserve’s members as the rate of inflation and the effect of the continued stimulus spending come under review.

While Fed Chairman Bernanke has signaled positive trends in an economic bounce-back, the climate seems tenuous.  With the first time homebuyer tax credit, which helped more than 1.2 million first time buyers enter the housing market, due to expire on November 30th, with unemployment continuing to close in on 10% and with a desire to pull back from continued stimulus spending, the Federal Reserve is walking a delicate tightrope.

Meanwhile, the world is watching and hoping that stimulus spending will continue despite its effect on the value of the dollar.  At the core of the national and global recovery is the American consumer who is staring at a shaky job market and a housing market that has cut 30% of their real estate equity.

On top of this balancing act, the Obama Administration is preparing for a definitive performance at the two-day Group of 20 meeting beginning on Thursday. 

In light of Bernanke’s recent comments about the state of the recovery and with some positive macroeconomic date, equity and forex markets await a signal that the Federal Reserve will pull back from the stimulus.  Such an announcement would certainly spark a reaction from the G20 ministers who are more interested in details about U.S. financial regulatory reform.

The FDIC To Go It Alone

Tough-minded FDIC Chairperson, Sheila Bair, has her own visions of the recession and the trajectory of the recovery.  Her views rarely coincide with Treasury Secretary Timothy Geithner or Federal Reserve Chair Ben Bernanke.  The strong willed and decisive Bair’s FDIC has seized 94 banks so far this year.  Along the way, Bair has established a reputation for strong-willed individualism.

It may be her personality that is preventing the FDIC from tapping a $100 billion credit line with the Treasury.  Then again, it may be Bair’s unwillingness to face Congressional scrutiny as she navigates the agency through turbulent waters.

As reported by the New York Times, Bair is considering asking healthy banks to participate in creating a fund to continue the FDIC’s aggressive actions.  The FDIC’s available cash has shrunk to just $10 billion, although $32 billion has been set aside for upcoming failures.  However, one unexpected failure could jeopardize the fund, which now stands behind $4.8 trillion in insured deposits.

The most likely plan will call for voluntary contributions by healthy banks and an assessment by the FDIC on all operating banks.  The contributions would be expected to solve the short-term liquidity problem.  Bair has always been reluctant to take banking issues to the taxpayer and her new initiative is testimony to her policy.