Dollar Crisis?

Well, everyone's been waiting for today, and the question now is how irrational will the rest of the world's investors and speculators react to today's realities. I've been working all day on the derivatives markets, that is trying to piece together enough honest information to comment on, when along comes today's drop in the dollar. Nice fit, this article and the next on "The Derivatives Bubble."

Weak Dollar Pulls Down Stocks

By REUTERS


Filed at 4:31 p.m. ET

NEW YORK (Reuters) - U.S. stocks sank on Monday after a call from the world's richest nations for more flexible exchange rates sparked a sharp drop in the dollar that ignited fears overseas investors would flee U.S. assets.

The Group of Seven industrial nations -- the United States, Britain, Canada, France, Germany, Italy and Japan -- said on Saturday that a flexible currency rate ``is desirable for major countries or economic areas'' in order to iron out global economic imbalances.

The G7 comments sparked speculation that Japan would not be as aggressive about selling yen and buying dollars to keep down the value of its currency.

While a softer dollar makes U.S. exports more competitive overseas, it also raises the risk that foreign investors will suffer currency losses on their dollar-denominated assets, making them less attractive.

``The weaker dollar will probably benefit U.S. manufacturing, but the big worry is that we're heavily dependent on foreign capital inflows, and you don't want to see everyone start dumping U.S. investments,'' said Ozan Akcin, chief investment strategist at Puglisi & Co.

The Dow Jones industrial average (.DJI) dropped 109.41 points, or 1.13 percent, to 9,535.41, while the broader Standard & Poor's 500 Index (.SPX) fell 13.51 points, or 1.3 percent, to 1,022.79. The technology-laced Nasdaq Composite Index (.IXIC) sagged 31.23 points, or 1.64 percent, to 1,874.47, based on the latest available data.

About 1.25 billion shares changed hands on the Big Board, while on the Nasdaq, about 1.71 billion shares were traded. Decliners outnumbered advancers on the NYSE by a ratio of about 24 to 9, while on the Nasdaq, about 21 stocks fell for nearly every 11 that rose.

Among stocks in the spotlight, Motorola Inc. (MOT.N) rose after it said late Friday that its chairman and chief executive officer, Christopher Galvin, would retire.

The departure of Galvin, who had clashed with Motorola's board over strategy, will end three generations of family control at the world's No. 2 mobile phone maker. Separately, Merrill Lynch said it raised its investment rating on the company to ``buy'' from ``neutral.'' Motorola shares rose 97 cents, or 9 percent, to $12.06.

Among decliners, chip equipment makers Applied Materials (AMAT.O) and KLA-Tencor (KLAC.O) were hit after a report in financial weekly Barron's said their shares are at ``extreme bubble valuations.'' Applied Materials dropped 81 cents, or 4 percent, to $19.67, and KLA-Tencor fell $1.57, or 3 percent, to $55.10.

But the focus of the day was the G7 statement, which was viewed as criticism of persistent intervention by Asian countries to keep their currencies weak to make their exported goods more affordable to consumers, especially to Americans.

The United States has been particularly critical of Japan and China for intentionally weakening their currencies since it puts U.S. goods and services at a disadvantage.

The dollar fell to a near-three year low against the Japanese yen, touching 111.41 yen, before rebounding to 112 yenThe sliding dollar also whacked U.S. Treasury prices, pushing the yield on the benchmark 10-year Treasury note up to 4.25 percent -- after rising to an intraday high above 4.32 percent -- from 4.16 percent late on Friday.

Asian central banks, in particular, have been massive buyers of U.S. Treasuries and agency debt in recent years, and the worry is that could decline with the dollar's drop. Investors further fret that rapidly rising interest rates could stifle the fledgling U.S. economic recovery.

``Any weakness in the dollar could push those fickle investors to take money out of Treasuries and repatriate it into either euro-denominated or yen-dominated securities,'' said Peter Gottlieb, president of Gottlieb Investment Management Corp. ``To the extent that one of the markets is undergoing some turmoil, I don't think that's good for any financial asset class.''

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Nice opening for my next post. I've done a lot of work on this blog over the past week. I have tried to use the best intellectual sources in the world for my posts. If you were to check it all out I think you may see it paints a pretty clear picture of where we're headed.