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Credit Fears Fail To Boost Dollar
Credit concerns increased on Friday with greater fears that there will be a contagion effect from hedge-fund difficulties. A key fear is that funds will have to put a much lower value on securities held as collateral and this will also result in increased margin calls. The net effect is likely to be a further significant tightening of credit conditions and an overall contraction of liquidity. <?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" /><o:p> </o:p> There have been two important currency trends during Friday. Firstly, the Swiss franc has strengthened against all major currencies with the franc strengthening back to 1.6550 against the Euro and 1.2290 against the dollar. <o:p> </o:p> The franc’s resilience on Friday is important, especially as there was still strong global interest in carry trades. The National Bank has decided to take a tougher stance and push market interest rates higher due, in part, to unease that carry trades have moved out of control. The Swiss currency remain well-placed to extend gains over the next few weeks if credit fears persist. <o:p> </o:p> The second significant development is that the dollar has failed to benefit from credit-related difficulties. In past periods of volatility, such as those seen at the end of February, the dollar has tended to strengthen when global stock markets fell. This was not the case on Friday as the dollar struggled while Wall Street dipped. <o:p> </o:p> Any sustained increase in risk aversion should still tend to support the dollar on a flow of funds into short-dated US Treasuries, but the Friday performance indicates that strong dollar gains are unlikely. There will be some speculation that a serious escalation of credit difficulties would force the Fed to cut interest rates. <o:p> </o:p> It is also still the case that a serious contraction of credit would cause serious difficulties for carry trades as a whole.