The U.S. Dollar has had quite a ride during the last two years.  The 2008 Crisis has caused huge waves of volatility to move through financial markets, and the foreign-exchange market in particular.  In this article we will examine the role of the U.S. Dollar in the global economy, and by examining how it has performed over the last two years during various market cycles, we may gain a better idea of where it is headed in the days and years to come.

In order to really understand the value of the U.S. Dollar, one must have a basic grasp of interest rate theory in relation to currencies.  Each currency in the world has an interest attached to it that is set by its Central Bank.  The manipulation of this interest rate increases and decreases the supply of a currency in the economy and therefore will either stimulate or tighten economic activity.  During the 2000’s, Fed Chairman Alan Greenspan kept U.S. interest rates at very low levels versus other industrialized nations around the world such as England, Australia, and the EuroZone.  These low interest rates in the U.S. led investors to flee from the U.S. Dollar in search of higher yielding currencies, which resulted in a very bearish U.S. Dollar run.  In this picture of the Euro, you can see the dramatic fall of the U.S. Dollar throughout the 2000’s.

In 2008, when the Global Credit Crisis really exploded in September of ’08, the currency market went crazy.  There was a mad rush into the U.S. Dollars as unprecedented fear caused investors to demand the safety of their capital above everything else.  From September of 2008 to March of 2009, the U.S. Dollar experienced a dramatic rise in value versus the Euro, Pound, and nearly very currency in the developed world.  The reason is because in times of complete uncertainty, the U.S. Dollar is the safest place to park capital.  Investors want assurance that their investment is safe, so they opt to place capital in low yielding but very safe investment vehicles such as U.S. Treasuries.

In March of 2009, the recession bottomed out.  Economic growth resumed in the developed world and it looked as though the worst was behind us, so investors began taking their money out of the safe, but very low-yielding U.S. Dollar and placing it in riskier currencies that were offering higher risk.  Thus, began another round of Dollar weakness.  Let’s take a look at another Euro chart.

The U.S. Dollar was very weak throughout the 2^nd and 3^rd quarters of 2009.  Then, in November of 2009, the Greek Debt Crisis erupted and send financial markets into a tailspin yet again.  Investor sentiment weakened around the world, and there was another mad rush into the safety of the U.S. Dollar.  The Dollar rallied significantly against the Euro from November of 2009 until June of 2010.

Once the European Central Bank finally stepped in to pledge bailout funds for Greece and other struggling EuroZone countries, investors again began to sell the U.S. Dollar in search of higher yield and the Dollar began to fall versus every currency pair.

This phenomenon of the U.S. Dollar doing well only during times of economic distress could be a long-term sign of bad things to come.  Currently, the only reason investors want to hold the U.S. Dollar is for safety.  There is no interest in it as an investment.  What will happen if the U.S. loses its place as a harbor of safety?  Investors already want nothing to do with the Dollar during good times.  What if they don’t during bad times either?  That could spell disaster for the U.S. Dollar.  A forex demo account can teach you how to take advantage of the volatility in the  FX Market.

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In 2009, the global economy appeared to be recovering quite nicely from the ’08 Sub-Prime Mortgage Crisis.  By March of 2009, the recession seemed to bottom out—equity markets began to rally, unemployment began to fall, and economic growth resumed.  It appeared that the global economy had weathered the worst of the Crisis.  Investor sentiment was broadly optimistic throughout the world, and the EuroZone was leading the recovery.  The European Central Bank had injected far less economic stimulus into its economies than the United States had, and the Euro suddenly seemed poised to make a serious run at the U.S. Dollar’s world reserve currency status. Click to continue →

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Recessions are a normal and even essential part of our modern economic system.  They tend to occur every 5-7 years as a normal function of the business cycle, and they are believed to purge waste from the economic system.  But the recession that came out of the 2008 Global Credit Crisis has not been a normal recession.  Normally, a recession runs its course in a few months and an economy resumes economic growth and upward movement.  The 2008 Crisis erupted in the early fall of 2008.  We are now in the late summer of 2010, and the economy is still facing major systemic risks that have caused Federal Reserve Chairman Ben Bernanke to say that the economic outlook for the 2^nd half of 2010 is “unusually uncertain.”  It is right and normal for a Fed Chairman to use such words to describe the economic outlook at the beginning of a recession, but to use those words two years into a recession???  That is scary. Click to continue →

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The average rate on a 30-year fixed rate mortgage dipped this week to 4.78%, the lowest levels we’ve seen since December 2009 and only slightly above that record low number of 4.71%.

The average rate on a 15-year fixed rate mortgage also dropped to 4.21%, which is the lowest 15-year fixed rate since the late 1980’s.

The economic situation in Greece and other European nations has caused the euro to drop significantly over the past several months. The result of which is falling stock markets around the world.

Whenever stock markets fall, investors often pour their money into the relative safety of bonds, causing mortgage interest rates to fall as a result.

It’s not just Europe investors are concerned about; the United States has also taken on tremendous debt and investors are concerned that both U.S. debt and the precarious economic situation in Europe could cause the economic recovery in the U.S. to stall.

That said, if Europe works out it’s financial troubles, economic recovery here in the U.S. could continue on an upward trend, driving mortgage rates higher, so if you’re considering refinancing, now may be a good time to take the leap.

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BP has been working on something called a ‘Top Kill’ technique in order to try and stop the more than 5,000 barrels (210,000 gallons) per day of oil that has been spewing out of the open well left when the Deepwater Horizon exploded more than a month ago.

The significance of the ‘Top Kill’ technique is that it’s never been attempted in waters as deep as this before, but considering all other options have either failed or been deemed improbable in the deep waters, it’s one of the few options BP has left to get this well sealed as quickly as possible (although I doubt ‘quick’ is a term anyone is using after more than a month of 210,000 gallons per day of raw crude spewing into the Gulf).

The top kill technique itself has actually been very successful at stopping oil leaks in the past, but hasn’t been attempted underwater and there is concern that the sheer depth (over 1 mile under the ocean) of this leak will cause problems. According to CNBC, BP estimates a 60-70% chance of success.

The top kill technique consists of pumping huge amounts of a manufactured mud and cement mixture into the well at significant enough pressure to counteract the upward pressure of the oil gushing out of the well.

BP started the procedure on Wed. night and it is expected to announce the success or failure of the procedure by mid-day today.

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I’ve been hearing quite a bit lately about the recovering U.S. economy, but questions still remain as to whether the changes we’re seeing are only short term fluctuations or actual improvements in the economy.

According to a recent article on MarketWatch, James O’Sullivan, an economist with MF Global, apparently feels that we’re seeing real economic recovery and that the outlook for the future of U.S. markets is positive.

Along the same lines, companies are beginning to hire again and, according to some research I did on housing prices recently over at Zillow.com, even the real estate market in many areas seems to have leveled off.

Homeowners able to pay are walking away from mortgages

All that seems to be pointing to a positive outlook for the U.S. economy as a whole, however, I’m also seeing signs of bad things to come. A perfect example is a story on 60-minutes the other day, in which they spoke with a number of homeowners who had decided to walk away from their homes, even though they were able to continue to make payments. For most of these homeowners, the decision to walk away was, of course, a financial one, but the motivations were slightly different from what we’re used to seeing. The people interviewed in the story were all capable of continuing to make payments on their homes, but due to the huge loss in value (as much as 50% in some cases), they chose to simply walk away rather than continue making payments on a property who’s value may never recover to the levels seen when they purchased the properties.

What’s interesting to me about this story is, morals aside, it seems this may be a reasonable financial decision for homeowners to make if they find themselves stuck with a million-dollar loan on a property now valued at $600,000, just to illustrate one example.

My concern is that many of the foreclosures we’ve seen recently have been a result of homeowners being unable to continue to make payments on their loans. This apparently new trend of walking away in spite of their ability to pay could create an entirely new problem for the housing markets and cause the recession to drag on into the foreseeable future.

The credit hit isn’t as bad as you may think

Morals aside, if you were looking at a 50% loss in your home value, and facing the prospect that your home value may never recover to the level it was when you purchased the property, wouldn’t you be tempted to just call it quits?

While these people will certainly feel a strong punch to their credit rating for a few years afterwards, my experience in the mortgage business tells me it’s only temporary and, as little as 2-3 years after walking away from their homes, their credit scores could recover to high-600’s to low 700’s.

So, which is better from a financial standpoint? Continuing to make payments on a mortgage that might forever be greater than the value of the home? Or simply call it quits, suffer 3 years of bad credit, and then move on?

I fear the latter option may become more and more appealing to homeowners currently underwater and if this were to become a popular strategy, the effects on the economy as a whole could be disastrous.

The moral issue

Another question that was brought up in the 60 Minutes report was the moral issue of walking away from your home. The justification one homeowner gave was that his bank wouldn’t feel bad about foreclosing on him, so why should he feel bad about walking away?

So what do you think? Should the moral issue be a concern? Is there a moral issue at all or is it “strictly business” as one interviewee put it?

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I’m a regular listener of This American Life, a weekly radio show hosted by Ira Hayes from Public Radio International. Each week they offer incredibly interesting stories about…well…pretty much anything. The thing that ties all their stories together is their uncanny ability to draw you into the situation and make you understand what’s happening; even when it comes to complicated topics.

Last week they featured a story about a hedge fund called Magnatar, who they claim not only saw the mortgage meltdown coming, but were able to figure out a way to profit from it on a pretty incredible scale. It’s worth mentioning that Magnatar denies the claim in this story that they intentionally set out to profit from the subprime mortgage collapse.

According to the story, Act One of the show entitled “Inside Job,” Magnatar sponsored the creation of complicated and, ultimately, toxic financial securities backed by low quality mortgages, which they then bought insurance against so that when those securities became worthless, the insurance would pay out big.

At first glance, this is a fairly typical investment strategy called “hedging,” in which a company purchases one set of securities as a primary investment and then purchases a second set of securities that will pay out if that first set drops in value. In this way, the second set of securities essentially becomes insurance against a drop in value of the first set.

The interesting aspect of this story, and the reason it posits that Magnatar was actually betting on the collapse of the subprime mortgage market is that Magnatar was able to work out deals in which the insurance would actually pay out significantly more if the primary investment failed than the primary investment cost to begin with. Not only that, but the reporters suggest that Magnatar intentionally pushed for low quality assets to be bundled into the primary set of securities, expecting them to fail so that they could collect on the much larger insurance payout.

To better understand the concept of hedging, consider this example. Let’s say you thought Gold prices were going to go up over the next year and so you decide to invest in Gold. However, just in case some event occurs that causes Gold prices to crash, you decide to also invest in the U.S. Dollar, knowing that when Gold prices go down, the value of the U.S. Dollar tends to go up. This way, if Gold prices do go up as you expected, you’ll reap the rewards of your investment in Gold, but if Gold prices fall catastrophically, your investment in the U.S. Dollar will likely increase in value, preventing you from losing all your money.

You can listen to Act 1 of the radio show online at This American Life’s website.

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The senate on Thursday confirmed Ben Bernanke for a second term as chairman of the Federal Reserve. The vote came after quite a bit of fuss about “bank bailouts” and one attempted filibuster and represents the closest confirmation vote ever for a Federal Reserve chairman.

Americans are upset about what they feel was a bailout of irresponsible banks and their senators brought that message to Washington, with Senator Jim Burning (R-Ky) claiming that “A vote for Ben Bernanke is a vote for bailouts.” Click to continue →

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You’ve heard the news. In fact, you may be living the news. Since the summer of 2008, almost everybody who owns a home has seen its value dramatically decrease. Some have lost more than half of the value of their home and because of that, the nation and the world has seen the overall economy seriously degrade.

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Thinking back to my childhood, one of my not-so-fond memories was the one that many kids have. It was my first bike. The training wheels were nice but it became time to man-up, as my father said, and go to two wheels. My father and I made plans. “This coming Saturday, we’re taking them off”, he said with his stern fatherly voice. I knew I had no choice.

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“It’s a traders market”

It may be the new normal. The advent of computer or electronic based trading has allowed for millions of stock transactions per second and with the 24 hour fast paced news cycle available to us in many different formats, the stock market has changed in two important ways.

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I don’t want to sound rude and I don’t want to offend the many hard working Realtors who are doing a great job of helping people find their dream home but maybe you have noticed the same thing as me: When I look in every corner of my world, there is a real estate agent.

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If you watch the financial news channels or read the business section of your local newspaper, you may have noticed something that is important to you as you make financial decisions: nearly all of the business news that you will read, view, or hear is sensationalized.

Don’t take my word for it. As I write this article, the stock market has had a dramatic move up. In fact, over the past 7 days, there have been triple digit gains in the Dow Jones Industrial Average. As I watch the financial news channels, nearly all of the stories talk about how the recent economic downturn may be over and recovery and prosperity may be here to stay.

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What is the meaning of discipline? You can look it up in the dictionary, you can ask twenty of your best friends, and you can find it on every school age athlete that wears his football t-shirt from last year. The word is thrown around everywhere you go and, at least in my experience, we look at what it means from an emotional angle but not a realistic or objective way.

Today, I want to use this word in the context of your finances. What does it mean to hold financial discipline? For those who have achieved the financial freedom that you wish you had, what are they doing or what did they do to get there?

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I remember my first computer. My father brought it home from work. It was from some company named IBM. I had never heard of them and for that matter, I had never heard of a home computer. I saw pictures of computers that were the size of small homes and I was excited at the thought of seeing one in my own house…a smaller one of course.

It was in 4 boxes, each one being a little heavier than the last. When we opened the box, what I saw was a whole lot of metal. It was thick, heavy, bulky, and the keyboard made a really loud clicking sound every time a button was pushed. I can still feel the crisp, clickety sensation of that old IBM model M keyboard.

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It’s about that time of year again. A fresh crop of high school graduates and their parents are heading to the discount stores to buy all of the college dorm room essentials. Food, bedding, electronics, office supplies, and a retro looking lava lamp are only a few of the must-haves for every college student.

Maybe you’re one of them. If so, congratulations on getting a part of your house back! Your days of freedom are getting closer and closer but along with buying your college bound child a brand new laptop computer, you have another job to do that is far more important. You have to have, “the talk.” No, not the birds and bees talk, hopefully you already had that one. I’m talking about the money talk.

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I love a good ball game. Here in town, we have a local baseball team. It’s not a professional team but the games are always sold out. Even season tickets aren’t available. There’s a waiting list that reportedly stretches years in to the future, so I’m told.

Still, I can normally get my hands on a pair of tickets a couple of times per year but there’s one thing I’ve noticed about baseball games and really, all sporting events I have attended: They cost a lot of money. Not only are the tickets expensive, but everything else is too.

Maybe you’re not looking to be rich but I bet you’re looking to either become or remain financially secure. In order to do that, you have to learn to be a cheapskate. I’m not saying that you should lie, cheat, or steal. Far from it, but what I do want you to do is not overspend. With that in mind, here are a few ideas to save money at the ballpark this year.

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Millions of people around the world have felt the pinch of the economic downturn. As unemployment rises, more and more people find themselves without a job. Many of those people find also their financial health quickly deteriorating.

This economic cycle has played out many times throughout our history. Unfortunately, the economy often improves faster than the damage that it did to the average family. Maybe you are one of those who has fallen victim to unfortunate economic conditions in the past but now you have began the rebuilding process and with that comes a new job in a new community.

With a new job often comes relocation and with relocation comes a new problem: You need a mortgage but have damaged credit. The good news is that the bad news may not be as bad as you think.

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If you’ve ever signed for a mortgage, or any other loan for that matter, you may be familiar with the 3-Day Right of Rescission. It’s a right granted to all borrowers to change their minds after the loan papers have been signed. There are limits of course, but the goal is to give the borrower just a bit of time after the papers have been signed to change his or her mind. It’s an added measure of protection and, as a current or future borrower, it’s your responsibility to understand how the law protects you.

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