Dollar Soars as Dow Breaks 7k

Last updated 3/2/2009 10:10 AM ET (GMT -5) 0 Comments - Add your comment

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Kathy Lien

Director of Currency Research, GFT

For the first time in 11 years, the Dow Jones Industrial Average has fallen below 7,000. Since the beginning of the year, the Dow has fallen more than 24 percent. From its summer highs, it is down close to 47 percent. If the recession turned into a depression, US equities could fall below 3k. After the Great Depression of 1929, stocks fell as much 90 percent from its highs. Currencies and equities have taken a serious beating as the recession deepens and AIG reports the largest loss ever for a US corporation. Investors continue to flock into the safety of the low yielding US dollar and Japanese Yen. Although the US economy is still very weak, investors expect the country to recover first especially as the problems in Europe raises the risk of massive capital outflow. The potential for the being the first country to recover is confirmed by the mild improvements in the ISM manufacturing, personal income and personal spending data. For the first time since June 2008, manufacturing conditions have deteriorated at a slower pace. This improvement came from left field since deterioration was reported by nearly all of the regional indices. However the data is not without weakness as the uptick came primarily from production, and supplier deliveries; employment and new orders continued to contract.

All of today's US economic reports contained underlying weakness. For the first time in 6 months, consumer spending has increased. Personal spending, which is different from the retail sales report rose 0.6 percent in the month of January thanks to beginning of the year discounting. Personal income also rose 0.4 percent, but the improvement is a bit distorting because only government workers have seen pay increases. There was also cost of living adjustments for Federal transfer payments like social security and unemployment benefits. The headline number is distorting because the private sector saw their incomes dwindle for the third consecutive month. Fears about job security has boosted the US personal savings rate to the highest level since March 1995. We expect this trend to continue which means that higher savings should cut into consumer spending.

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About The Author

Kathy Lien began her FX trading career 10 years ago at J.P. Morgan Chase. After graduating New York University’s Leonard Stern School of Business at the age of 18, Kathy joined the bank's interbank FX trading desk and eventually moved to the cross markets proprietary trading desk. In the interbank market, her ability to create solid fundamental and technical analysis from the myriad of information on the market helped her trade forex spot and options. Her experience eventually led her to be chief strategist at Daily FX where she worked until she joined GFT in 2008.

With her knowledge of forex, as well as her experience trading other products, such as interest rate derivates, bonds, equities, and futures, Lien has built a reputation as an international currency analyst. She is frequently quoted on CNBC, Bloomberg, Fox Business and Reuters. Lien has also written for publications like Active Trader, Futures, and SFO magazine. She is the author of the newly updated Day Trading the Currency Market: Technical and Fundamental Strategies to Profit from Market Moves, and the co-author of Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game with Boris Schlossberg.

To buy Kathy’s newly updated Day Trading and Swing Trading the Currency Market: Technical and Fundamental Strategies to Profit from Market Moves, click here.