U.S. dollar flight to quality trade comes good

The markets reacted badly to the announcement on Wednesday that Dubai (part of the United Arab Emirates federation), asked to delay payment on billions of dollars of debt issued by conglomerate Dubai World and its main property subsidiary Nakheel. This has been the culmination of the end of a property boom that that gripped the Kingdom and was part of its strategy to diversify away from Oil and make Dubai the leisure capital of the world. A strategy that has been scuppered by the collapse in the property market.

Both the FTSE and Nikkei fell over 3% yesterday with the U.S. markets being closed for Thanksgiving. Prior to this news, the U.S. dollar was under heavy pressure during the week as the release of minutes of the last Federal Reserve meeting worried traders of the currency because the decline of the dollar was considered "orderly" suggesting that intervention to strengthen or stabilise the currency was unlikely in the short term. The Greenback has faced multiple pressures as the growing budget deficit, low interest rates and the Carry Trade * have all conspired to weaken the U.S. currency. It is a fact that a tightening of Fed policy to increase interest rates will cut off the opportunity for the Carry Trade and there seems to be an opportunity to be long on the dollar (short term trade) for the following reasons:

1. The uncertainty in the global markets caused by emerging markets bank exposure driving a flight to quality
2. The possibility that recovery in the U.S. economy will happen faster than anticipated will cause the Fed to tighten
3. Pressure from the Chinese to stabilise the decline in the dollar
4. Any government signals that the deficit will be brought under control in the medium term

With the U.S. dollar out of favour a contrarian bet was placed on Wednesday. - short Euro/U.S. dollar from $1.51 and buy U.S. dollar/South African Rand at $7.59. Profits taken this morning at 8am but trades resumed at 11am.



* Carry trade: A strategy in which an investor sells a certain currency with a relatively low interest rate and uses the funds to purchase a diff erent currency yielding a higher interest rate