Heavy Sell-Off Of US Stocks Puts Downside Pressure On US Dollar

Stock markets are still spooked on Wednesday following the US government’s rescue of AIG (AIG), the world’s largest insurance company late Tuesday. In the forex markets, the US dollar is trading with a weaker hand. The aversion of a near-term collapse of AIG hasn’t brought joy to the US dollar, and fears of more trouble potentially brewing in the US financial sector could hurt the dollar. The US dollar is weaker against the Euro, Swiss franc and the British pound in forex trading, but is stronger versus the Canadian dollar and the Australian dollar. The Japanese yen has gained strength versus the US dollar, British pound and Euro as traders cut back on carry trades in light of the bearish stock markets.

Chaos reigned once more in US stock markets, with the Dow (^DJI) plunging more than 300 points at the time of writing. Stock analysts, who said that Lehman’s (LEH) bankruptcy and the US government’s bailout of AIG would calm the markets, are wrong. Apparently, many people, particularly retail investors, are scared that there might be more worms lurking beneath the carpet. It is not that people do not know what’s going to happen, but rather, they aren’t sure which shoe will be dropping next.

The sharp fall in stocks was despite the US Treasury saying it will start selling bonds for the Fed to aid it with its lending efforts, and the SEC announcing that it will strictly enforce a ban on naked short-selling beginning Thursday. All the talk about market manipulation due to short-selling activity is rather ironic, considering that the government is the biggest market manipulator and by introducing these restrictions, it is further “manipulating” the markets, trying to force an end to the downside.

Investors’ fear is rising again, as can be seen from VIX (^VIX), which rose to 32% on Wednesday from 30% at market close Tuesday. Is it too soon to call it a bottom when the VIX is not near the peak fear high (49%)?

Economic Calendar For Thursday:

UK retail sales 0830 GMT

SNB rate decision 1200 GMT (rate expected to stay at 2.75%)

US initial jobless claims 1230 GMT

US Philly Fed 1400 GMT

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