Trading Forex

Currency dollar euros

The dollar and yen surged Friday -- with the yen the clear winner head-to-head versus the dollar -- as traders and institutions added both currencies in a flight-to-safety on concern that all of the world's major economies will fall into a recession at the same time.

The dollar surged 3 cents versus the euro to $1.2642 and 6 cents versus the British pound to $1.5606.

The yen strengthened 4.7 yen to 92.64 versus the dollar and about 10 yen to 144.73 yen versus the British pound.

Institutions raise cash in dollars, yen

Currency Trader Andrew Resnick told BloggingStocks Friday, this morning's flight-to-safety is not solely due to economic fundamentals, which suggest slowing growth in the world's major economies, but also hedge fund / investment fund de-leveraging and closing out of losing stock positions.

"We're seeing many things happen at once, and that's producing these enormous moves. First, the carry trade [where traders borrow yen and invest it elsewhere] is unwinding. Leverage for investing purposes is declining as a trading strategy," Resnick said. "Second, major players are raising cash to cover redemptions, which is also causing stock markets globally to plunge."

"Third, we're seeing a re-pricing of risk to the higher, which is forcing some funds to raise even more cash, boosting the dollar," Resnick said. "Some of the moves are cash-necessary moves, but many are clearly panic-based, with traders exiting positions that have little chance of succeeding if the global economy continues to slow."

Resnick said economic fundamentals that he's reviewed "do not justify, for the most part, the massive flight to the dollar and yen that's occurring today."

"These are largely panic moves driven by institutions who are exiting positions and piling into Treasuries and the yen, with leverage unwinding exaggerating the moves. As bad as the risk factor was ignored during the mortgage financing and leverage boom, risk is being magnified now, to the extreme," Resnick said. Resnick added that he was presently flat, or had no open currency trading positions.

Forex / Economic Analysis: As Resnick noted, the yen's high value, despite Japan's low interest rates, and the dollar's rise have been driven considerably by fear: the yen seen as a 'toxic-asset-free zone,' due to Japan's relatively low exposure to distressed / bad mortgage bonds; the dollar attracting buyers in the classic flight-to-safety move.

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