The Canadian dollar took a beating on currency markets Tuesday and
stock markets tumbled amid investor disappointment in the U.S.
government's financial rescue package.
stock markets tumbled amid investor disappointment in the U.S.
government's financial rescue package.
The currency closed down 1.97 cents (U.S.) to 80.24 cents after
going as low as 80.04 cents as investors dumped a wide variety of
currencies and bought into the U.S. dollar.
So … the rescue package for the US financial sector was poorly received, and investors responded by buying USD? Now that's a strategy for countries facing a currency crisis: engineer a financial meltdown! People will flock to buy your currency!
It's okay to say "Here's the news. We haven't a freaking clue as to why it happened."
Worthwhile Canadian Initiative 
Normally I would agree that media explanations for forex moves rarely capture the underlying dynamics, but in this case, the article got it right. With the sell off in the stock markets, the US dollar rose today against every major currency except the Japanese Yen and gold (and US Treasuries). This is an example of risk aversion in action.
The US Dollar and Japanese Yen are carry trade currencies, that is investors borrow US Dollars and Japanese Yen and then buy riskier investments including stocks often in other currencies. When there’s a general move away from risky investments, such as today when there is a general stock market rout, the US Dollar and Japanese Yen strengthen as the investments are sold and converted back into those currencies. Risk aversion in the markets strengthen these two currencies, an appetite for risk weakens both.
For both of these countries, strong currencies are actually counterproductive. For the US, the sector of their economy that was perhaps the strongest in 2008 was their export sector, which benefited from the weakening US dollar. This source of strength has now disappeared. Japan is even worse straights, with their economy being almost entirely based on exports, the strong Yen has contributed to this country now having a current account deficit.
Okay, but here’s the thing: if the USD had fallen today, the story would have been ‘Markets disappointed in US bailout package; investors flee the USD’.
Where do you go if the market is volatile, the whole western world is in the dump? To gold! Up $21.
I have to agree with Kosta here. If you look at USDCAD rate fluctuations over the past year or so, you’ll see that negatives US news/numbers are very regularly accompanied with a rise in the USD. For a simple explanation, see Alea: http://www.aleablog.com/dollar/
USD leverage means that when things are perceived to be getting worse, investors/banks/hedge funds, will buy USD and treasuries to cover their liabilities. What’s funny is that this sort of reverses normal relationships between FX movements and news. For example, when NFP comes out worse than expected (as per forecasters’ average prediction) the USD tends to rise against other currencies, when in normal circumstances, the oppositite should be expected. But I can see where you are coming from. More often than not, the Globe along with most media outlet will try to rationalize FX and stock movements that are little more than noise. In this case, however, they did get it right.