Dollar Index And The Financial Sector

Dollar Index: The key for the dollar's movement today was seen as equity markets ended their rally, which topped out on Monday at just over 20% from the Nov. 21 low. Global stock markets were mixed in overnight trade but mostly higher even as S&P futures declined slightly. U.S. markets opened lower, got a brief boost after the pending home sales number handily beat analysts' expectations, then fell throughout most of the day on concerns regarding corporate profits. The dollar advanced against the higher-yielding (for now) euro, pound and Australian dollar but fell to the yen as risk was sold. Also helping the index today was a move higher against the loonie, which came on the heels of a dovish interest rate statement from the Bank of Canada along with a 3.5% decline in the price of crude oil.

Regarding the incoming administration's economic stimulus plan, estimated by some observers to likely fall between $500 billion and $700 billion,the Obama team believes that for the next 18 months it would be a mistake to let deficit concerns steer government fiscal policy. In that period, the deficit will rise to levels that once would have seemed alarming. The $455 billion deficit for the fiscal year that ended Oct. 1 already is the largest on record in dollar terms although as a percentage of gross domestic product it amounts to 3.2%, less than at the peak of the 1980s downturn.

But the deficit will be a lot worse next year, likely reaching between $750 billion and $1 trillion, depending on how costs of the financial-sector bailout are accounted for. The only real question is whether the deficit, as a percentage of GDP, cracks the postwar record of 6% set in 1983. If the red ink hits $900 billion or so, it will.

The Obama team's best guess is that, though stimulus spending will be spread over the first two years of the new president's term, the deficit will hit the high-water mark in the first year, with economic improvements in 2010 generating government revenue that starts to gradually bring it back down. If the Obama team gets lucky, and the government can start selling at a profit some of the assets it's buying up to rescue the financial system, the decline could be faster after that.

On Tuesday, the Dollar index gained 32.5 basis points (0.38%) to close on 85.886.

The Financial Sector: The Treasury sold $30 billion of four-week bills at 0.00% for the first time since it began selling the securities in 2001. The offering was four times oversubscribed as demand for the safety of U.S. debt during the worst financial crisis since the Great Depression continued unabated.

Foreign central banks bought 47.2% of the amount sold, compared with 31.7% in the prior auction. Primary dealers bought 52.1% while individual investors purchased 0.7%.

Yields on U.S. debt have plummeted this year to record lows as investors have gravitated toward their safety as global stock markets plunged. Rates on three-month bills traded at a negative rate of 0.01% Tuesday. The Treasury sold $27 billion in three-month bills Monday at a rate of 0.005%, the lowest rate since it starting auctioning the securities in 1929. The rate on four-week bills peaked at 5.175% Jan. 2007.

U.S. House lawmakers harshly criticized former Fannie Mae and Freddie Mac executives on Tuesday, blaming them for knowingly taking on excessive risks that helped lead to the government takeover of the firms. "The CEOs of Fannie and Freddie made reckless bets that led to the downfall of their companies," House Oversight and Government Reform Chairman Henry Waxman (D., Calif.) said. "Their actions could cost taxpayers hundreds of billions of dollars."

Republicans struck an even harsher tone. Rep. Darrell Issa (R., Calif.) said the two government-sponsored enterprises were "a primary cause, if not the primary cause" of the collapse of the housing market. "Outright fraud and greed wasn't isolated to just Wall Street," Mr. Issa said. "Fannie and Freddie shared in this disgrace as it drove much of the poor decision making that have led us to where we are today."

Lawmakers cited thousands of documents collected by the committee that Waxman said "show that the companies made irresponsible investments" that destabilized the firms and forced the government to put the companies in conservatorship in September. Specifically, the panel released a June 2005 presentation made by former Fannie CEO Daniel Mudd that suggested the firm should move away from the traditional mortgage market in order to take advantage of the growing subprime and non-prime loan businesses.

"If we do not seriously invest in these 'underground' type efforts and the market changes prove to be secular, we risk: becoming a niche player; becoming less of a market leader; becoming less relevant to the secondary market," the presentation slides say.

On Tuesday, the XLF fell 0.55 points (-4.02%) to close on 13.12. The volume was relatively light; 193,263,587 ETF’s changed hands against a daily average of 247,786,000.