This post is a guest contribution by Dian Chu*, market analyst, trader and author of the Economic Forecasts and Opinions blog.

The dollar’s value against major currencies has fallen in recent months as the US fiscal outlook worsened and amid expectations that interest rates will remain close to zero for some time to fight the economic downturn.

This week, the euro broke above the psychologically important level of $1.50 driving gold prices to record levels, prompting many global central banks intervening on currency markets to slow the dollar’s fall (Fig 1).

How did we get here?

Since the financial crisis last fall, currency markets have taken their cues mostly from stock markets. When stocks plunged in March of this year, investors rushed to the safety of US government bonds, pushing the

This post is a guest contribution by Dian Chu*, market analyst, trader and author of the Economic Forecasts and Opinions blog.

Last Friday, US crude oil futures finished above $78, the highest level in a year, surging more than 9% during the past week making it the largest weekly gain since the height of the summer driving season, even though the US continues to sit on ample supply of petroleum.

Given the continued sluggishness of the economy, high unemployment rate and large amounts of excess oil production capacity around the world, analysts said a sudden upward spike was still unlikely, while others are predicting an immanent correction down below $70.

However, if you take a closer look, it is evident that the current crude oil market is almost entirely detached from fundamentals. Furthermore, there are several factors supporting oil rising to new levels, as fundamentals are

This post features a discussion at the Yalta Annual Meeting/Yalta European Strategy between Alan Greenspan, former chairman of the US Federal Reserve, and Dominique Strauss-Kahn, the managing director of the International Monetary Fund (IMF). The moderator of the three-part discussion is Chrystia Freeland, US managing editor of the Financial Times.

Part 1: The financial crisis

Click here or on the image below to view the video.

Part 2: Global financial regulation

Click here or on the image below to view the video.

Part 3: Crisis exit strategies

Click here or on the image below to view the video.

Source: Chrystia Freeland, Financial Times (here, here and

This post provides links to a number of interesting articles I have read over the past few days that you may also enjoy.

• David Rosenberg (Financial Times): Equities carry too much risk, September 23, 2009. The banker J.P. Morgan was fond of saying: “I never buy at lows, I never sell at the highs, I play the middle 60 per cent.” Well, from our lens, we are well past that middle 60 per cent point of this bear market rally.

• Roman Frydman and Michael Goldberg (Financial Times): An economics of magical thinking, September 23, 2009. Confidence seems to be returning to markets almost everywhere, but the debates about what caused the worst crisis since the Great Depression show no sign of letting up. Instead, the spotlight has shifted from bankers, financial engineers and regulators to economists and their theories. This is not a

Sorry for the hiatus, but I am preparing a large note on the ECB, whether it is conducting QE or not, what QE at the ECB is, and finally what the prospects of an exit strategy is. This has taken most of my time the last week. I will be posting this report shortly. Meanwhile, I will leave you with the following fresh report from the FT about the earnings derived from the ECB's open market operations (emphasis is mine) which is naturally, although not directly, related to  my analysis;

The European Central Bank has made up to €1bn in extra profits from crisis-related emergency lending, but its caution on unconventional policy measures has curbed potential earnings, analysts estimate. Extra liquidity pumped into the eurozone banking system since the collapse of Lehman Brothers last year has probably generated an extra €900m ($1.5bn, £780m) in

In case you have not heard the news, China has announced that it will be instructing its state-owned enterprises to potentially default on their derivatives contracts. As I have written extensively in the past, the derivatives market is a massive time bomb just waiting to go off. China’s latest move may be the match that lights the fuse.

All told, US Commercial banks own $202 trillion in derivatives in notional value. To put that number into perspective, it’s roughly four times the global GDP. And 96% of this exposure sits on five banks’ balance sheets. I’ve shown the below chart before, but it’s worth re-visiting (chart is denominated in TRILLIONS).

Of course, not ALL of the $202 trillion these guys own is “at risk.” As their name implies, derivatives are “derived” from underlying assets (homes, debt, etc). The actual “at risk” money can be far FAR smaller than the “notional” …

In these hectic economic times, hedging one’s bets is always a wise idea. What may or may not happen to the world economy now or down the road should be a concern. Although price swings are a concern, metals are a solid way to hedge. Some investors prefer owning the actual metal while other’s find owning the mining company a better way to go. Each has its pluses and minuses, but at least a small part of a portfolio should include one of these options in any particular concentration.

North American Palladium Inc., a diversified precious metals exploration and development company, works to develop palladium, platinum and gold deposits primarily in Canada. The company has recently discovered additional possible reserves at its Lac des IIes mine and completed the purchase of a gold mining operation in Quebec.

From all appearances, the company has a very well seasoned exploration team working at its

This post provides links to a number of thought-provoking articles I have read over the past few days that you may also find interesting.

• Richard Bernstein (Financial Times): America is for now still blowing bubbles, July 20, 2009. By preserving capacity to avoid taking pain today, the US is following the approach that led Japan into a lost decade.

• Kenneth Scott and John Taylor (The Wall Street Journal): Why toxic assets are so hard to clean up, July 21, 2009. Despite trillions of dollars of new government programs, one of the original causes of the financial crisis — the toxic assets on bank balance sheets — still persists and remains a serious impediment to economic recovery. Why are these toxic assets so difficult to deal with? We believe their sheer complexity is the core problem and that only increased transparency will

Barclays Capital came out predicting a quick end to the shallow Israeli recession, and a return to decent growth of 2.9%  by next year.  Keep in mind that the Israeli economy was late to the ‘recession game’ and looks to be an early ‘exiter’ from economic turmoil as well.

With all this great news Barclays said that they expect an Israeli Shekel/USD exchange rate of 3.65 buy the end of the year. That’s a big move from the 3.93 area that the currency is trading at now.

According to Globes: “Barclays sees a less severe recession in Israel, and relatively quick growth recovery. The investment house bases its optimism on the fact that about 75% of Israeli exports are high-tech goods, and Barclays says that a rise in the Tech-Pulse Index - showing a US high-tech recovery - points to stronger Israeli exports. The Tech-Pulse Index,

“Words from the Wise” this week comes to you in a shortened format as I do not have access to my normal research resources while on the road in Europe (also see my post “Gone A.W.O.L. - to Slovenia and Switzerland“). Although very little commentary is provided, a full dose of excerpts from interesting news items and quotes from market commentators is included.

While investors’ hopes of an economic recovery might have got ahead of reality, the cartoonists continually reminded us of worrisome issues …

Source: Signe Wilkinson, Washington Post,  June 18, 2009.

The past week’s performance of the major asset classes is summarized by the chart below - a mixed bag so to speak.

Source: StockCharts.com

A summary of