The dollar in pictures

I promised myself when I started this blog that I would stay away from any charts, equations and all the “scary” stuff that compels readers to click their way out. Yet, when it comes to what’s going on with the dollar these days, I can’t resist… a picture says it all. But let’s go back to the beginning.


It’s a hot, summer morning in July, New York is sleepy, the Hamptons are bustling and a burger in Rome costs $5.40.

Not for long… Come August, Ben’s equals around the globe go on an almost-coordinated confession mode to concede that America is not alone in its economic downfall. Darkness all around, from Tokyo to Sydney to Frankfurt to Rome. The dollar goes ballistic. The euro is no more. By September, the Romans can enjoy their burger for “just” $4.70.

But something is strange… True, central bankers spoke gloom. But nobody seeCH_EU_rates_Calm.jpgmed to believe they would do much about it… like, cut rates. And rates do matter for currencies. Indeed, Europe’s interest rates remained a “sea of calm,” rather than fall precipitously—which they would have, had investors forecast cuts.

Maybe the dollar was now the haven of safety du jour? Hard to digest, with news coming out of America growing scarier by the day: “Unemployment skyrockets!” “House prices are sliding!” “Watch out! Fannie and Freddie at the edge of a cliff!!”

Panic and mistrust; that’s what it was.

The problem had been brewing for months. As the subprime crisis unfolded, crashing markets and toxic assets built a culture of mistrust among banks. A hoarding binge developed, whereby anyone with cash refused to lend it—keeping it instead in their vaults, checking deposits or under their pillow.

The “calm” following the rescue of Bear Stearns was all but deceiving. Despite Ben’s heroic provisions of liquidity, lending rates among banks remained at spooky levels. Banks were still reluctant to lend one another.

CH_Libor_OIS.jpgWith dollars a scarce commodity, American banks decide to get themCH_US_Banks.jpg from wherever they can—so they begin repatriating money from abroad, in record amounts.

Mind you, not just American ones. Foreign banks also scrambled for dollars, especially Europeans (and Swiss) who had been lured to buy the assortment of “lucrative” acronymed stuff (MBS, ABS, CDS, CDOs, etc) their American brethren issued, to pump up their profits. This “stuff” had to be financed to remain in their books—or sold in the free market at rock bottom prices.

Come September. The dollar is still on steroids, from its rally in August. But U.S. economic news remain abysmal. Voices begin to wonder whether it’s getting a bit too much. “Ok, the dollar has bottomed, the rest of the world stinks, but isn’t it our Fannie and Freddie falling off the cliff? Isn’t the dollar moving too much, too fast?”

Yet, as Hank rushes to catch Fannie and Freddie, the dollar is now on an even higher demand. Trust collapses, lending freezes and banks hoard cash like never before in an effort to avoid calamity.

Some don’t make it. In an experiment of free-market capitalism, Hank & co. let Lehman Brothers fail. Hank was resolute: “We have to protect the taxpayer!… Must penalize reckless behavior!” (“And, Gosh, let’s see what happens..!”)

See what happens… Monday morning, investors wake up to the shocking(!) news that banks can actually fail, no matter how bfear.jpgig. Panic and horror ensues. Banks, insurers, anything with “financial” on its job description is under attack. “Sell” is the word; “sell” and “help!” and “tsunami coming!” and “Where is Hank??!!”

Worse, Lehman’s bankruptcy creates a huge hole in credit markets. Correction.. a gigantic hole. Who’s gonna cover it?

Hank calls Ben: “Ben.. hi.. uurr, we have a situation here… looks like we might have scr#&ed up with that Lehman’s thing.. Every bank is under attack.. Goldman’s is under attack! Can you help?”

Ben: “Oh hi.. Hank!.. You again!… I mean, what can I say… bailouts are really the Treasury’s business. I can stand beside you in Congress, but… Ok ok.. I get it.. $700 billion not enough.. yes, maybe I can throw in a few hundred billion on my side.. ok, I see… whatever it takes…”

So while Hank practices his negotiating skills with a less-than-impressed Congress, Ben steps up the Fed’s liquidity provision to chickenvsdefenestration.pngthe markets.

Not enough. Money markets freeze, companies lose access to credit, people are pulling money out of their bank deposits. Dollars are now a precious commodity. Never mind America’s economy is in shambles. Economic “fundamentals” are thrown out of the window… CH_FWD_Implied_Rates.jpg

Not only is the dollar “precious.” It’s more precious than other currencies in this environment.

Foreigners have been screaming for dollars for months now, to finance their dollar assets, and the Lehman’s debacle only worsened the situation.

In fact, they became so desperate, that they started dumping other currencies, or anything liquid they had, to get their dollars, pushing dollar interest rates through the roof.

So when will this end??? That’s the billion dollar question, although as Ben is flooding the world with dollars and governments across the world step in to guarantee interbank lending, you’d expect some hints of return to normality.

And when this happens, the Romans may find themselves having to pay a little more for their burger than they do today.

Originally published at Models & Agents on Oct 14, 2008 and reproduced here with the author’s permission.