Big-Bank Stress Tests Stress Currencies

The results for the stress tests are coming in and unfortunately Bank of America (BAC) and Citigroup (C) are the first to be singled out. At the same time, the world is growing more and more fearful about the Swine flu and I think this is an overreaction. Yesterday, I wrote about how the impact of the Swine flu on the U.S. dollar should be limited based upon the reaction of the G10 currencies to the Avian Flu and SARS. However I did not rule out further dollar strength but only because of problems related to the global financial crisis and not the swine flu.

The stress tests on banks have caused a lot of jitters in the financial markets even before the outcomes were announced. Initially many investors believed that the tests were nothing more than a political move by the Obama Administration to boost investor confidence, with nearly all of the banks expected to pass the tests with flying colors.

Instead the Obama Administration is not playing any games. They realize that smoke and mirrors no longer work because banks need to be financially sound in order to have a lasting recovery in the economy. Expect more banks to fall under the knife in coming days but just because the regulators believe that BoA and Citi need to raise more capital doesn’t mean that they are insolvent. The Obama Administration has made it clear that they will not allow any of the top 19 banks to fail. The banks have until the middle of the week to refute the findings and deliver a response. They then have 6 months to raise capital either from the investors or the U.S. government.

The results of the stress tests will continue to hang over the market this week, limiting any meaningful correction in the U.S. dollar.

Graph: Wall Street Journal

About Kathy Lien 236 Articles

Kathy Lien is an Internationally Published Author and Chief Strategist of DailyFX.com, one of the world’s most popular online websites for currency research. Her trading books include the highly acclaimed, Day Trading the Currency Market: Technical and Fundamental Strategies to Profit form Market Swings (2005, Wiley); High Probability Trading Setups for the Currency Market E-Book (2006, Investopedia); and Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game (2007, Wiley). As Chief Currency Strategist at FXCM, Kathy is responsible for providing research and analysis for DailyFX, the research arm of FXCM. She also co-edits the BK Forex Advisor, an Investopedia.com Premium Service with Boris Schlossberg – one of the few investment advisory letters focusing strictly on the 2 Trillion/day FX market.

Kathy is also one of the authors of Investopedia’s Forex Education section and has written for Tradingmarkets.com, the Asia Times Online, Stocks & Commodities Magazine, MarketWatch, ActiveTrader Magazine, Currency Trader, Futures Magazine and SFO. She is frequently quoted by Bloomberg, Reuters, the Wall street Journal, and the International Herald Tribune and has appeared on CNN, CNBC, CBS and Bloomberg Radio. She has also hosted trader chats on EliteTrader, eSignal and FXStreet, sharing her expertise in both technical and fundamental analysis.

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