Stock Rally Tempts Carry Traders Back Into The Market, Causing US Dollar To Fall Sharply

Bailout Nation, that’s what comes to my mind when I hear about the Fed and US government coming up with their latest and broadest plan to erase all the toxic mortgage-related assets from banks and other financial institutions (Paulson said Friday that he will ask Congress to take legislative action next week). They have figured it won’t be enough to bail out individual companies one after another since so many companies are in deep trouble, drowning in debts and losses due to the absence of liquidity in the credit markets. Of course, stocks all around the world have shot up in a one-way street in response to this and also other plans announced by global central banks.

US President Bush authorized the US Treasury to tap up to $50 billion from a Depression-era fund to insure the holdings of eligible money market mutual funds, plus SEC’s Cox has just announced on Friday a ban on normal short selling (not just naked short selling anymore!) on 799 financial stocks in the US till October 2, imitating UK FSA’s footsteps. In the UK, short selling of banks, insurers and other financial companies will be banned starting next Tuesday and will last till the end of 2008.

The US dollar initially rose but later fell sharply against other currencies like the Euro, Swiss franc, British pound and other high-yielding currencies (except the Japanese yen) in forex trading, as risk appetite returns with a vengeance. In the past few days, US dollar was in such high demand as institutions stocked up on safe US Treasury bonds, but now the situation has reversed. With stocks soaring high and higher, the Japanese yen has become a victim. Carry trade interest has returned and may stay for the time being as long as stocks are having their forced rally.

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