Turbulent times – dollar drops again, gold gains ground

These are pretty interesting days as lots of things are going on right now on the financial markets. A couple of hours ago for instance JPMorgan Chase announced they’ll buy Bear Stearns for just $2 a share in a stock-swap deal and also significant is that the Fed agreed to fund up to $30 billion of Bear Stearns’ less liquid assets which protects JP Morgan against losses from buying Bear. At the same time the Fed also announced a new interest rate cut of a quarter percentage point to 3.25%.

Bear Stearns suffered hard from the credit crisis – the company’s stock closed 47.4% lower at $30 per share on Friday. The Wall Street firm has a book value of $84 per share and executives claim the huge discount should give JPMorgan a “cushion of protection”:

Bear Stearns has a book value of $84 per share. Executives said the sharp discount in the purchase price provides a cushion to protect JPMorgan in turbulent times and would provide the company “margin for error.”

Bear Stearns was on the brink of financial collapse Friday when JPMorgan (JPM, Fortune 500) and the Federal Reserve Bank of New York said they would provide the brokerage a short-term loan. Bear was dealing with a classic run-on-the-bank: The firm’s short-term creditors refused to lend the firm any more money and simultaneously demanded repayment of outstanding debt.

Treasury Secretary Henry Paulson said on Sunday that talks about how to rescue Bear had continued throughout the weekend. He defended the Fed’s bailout on Friday as “the right decision” and said the Bush administration was ready to take other actions to bring stability to the financial markets.

krand.jpgAfter the announcement of this news Asian financial markets plunged, gold rose more than 2.5% to $1032,85 per ounce and the U.S. dollar reached a new record low of 1.5906 dollar per euro. The more the dollar falls the more money gets transferred into oil and gold. Since early 2007 oil prices have nearly doubled and gold gained almost 60% from $650 to more than $1,025.

The collapse of the dollar is very worrying and more and more analysts believe central banks are going to plan a coordinated intervention to put an end to the drop. The last time the central banks made an intervention on the currency exchange markets was in September 2000 to stop the euro from falling against the U.S. dollar.

Just about everyone thinks European currencies and the Japanese yen are hugely overvalued against the U.S. dollar at present levels. Goldman Sachs (GS), for instance, says its “fair value” measure for the dollar against the euro is $1.21, not today’s $1.56. But many analysts now think that in the next few weeks the dollar could be hit with yet more declines.

The dollar’s record-breaking slide may trigger the first coordinated effort to shore up the currency in 13 years, according to strategists at Morgan Stanley and Goldman Sachs Group Inc.

The currency yesterday fell below $1.56 a euro for the first time and slumped to the lowest level in 12 years versus the yen. That has prompted complaints from European Central Bank President Jean-Claude Trichet and Japanese Finance Minister Fukushiro Nukaga. U.S. Treasury Secretary Henry Paulson said yesterday he backs a “strong dollar” and refused to elaborate when questioned at a press conference in Washington.

The challenge for officials is fighting the $3.2 trillion- a-day currency market while the Federal Reserve reduces interest rates and the U.S. economy falters. With traders increasing bets on a weaker dollar, the Group of Seven nations may be compelled to act, some strategists said.


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