The excesses of this unfinished decade are being rectified aggressively, and the pendulum is swinging hard from high-flying over-leveraged free for all trading to the other pole. The VIX has soared to record highs while rumors fuel panic.  The high volatility permeated the FX markets as well, but not the panic of a bleak future that affects stocks. As the US financial system is shrinking, the need for dollars remains high, and this demand reversed a long-term downtrend for the US currency.  Our economy might be in a shambles and the carry-trade dead, but the dollar, ironically, should remain strong. Enjoy it, with extreme care!

The financial crisis has only started and the wild gyrations in the stock markets may provide better levels to liquidate stocks. Hedge funds and pensions funds will probably face further distress. The outlook is extremely grim. But we focus on currencies, and this is and will remain the island of profitability for months and probably longer. The dollar should remain strong in the medium to long term, especially versus the European and the commodity currencies. But this week, the US currency could see some consolidation with a bearish tone.     
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The crisis affecting the financial markets, especially in the US, is unprecedented. The house of cards built over many years on unreasonably cheep money, financial fraud, power abuse and lack of competent regulation has been blown away. The force of gravity always works, even if it takes longer than normal to assert itself. Those responsible for this historical disaster will remain largely unpunished and most of them will actually be rewarded. And so it goes. With the appetite for risk annihilated, the European and the commodity currencies were sold in panic against the Japanese yen. Barin
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The demand for funding out of Europe and ongoing liquidation of yen crosses pushed the dollar sharply higher versus the European currencies last week.  While profit taking should be seen this week, the outlook for the currency remains strong. The risk to it is the equity markets, which have fallen sharply and should sink further, despite the no short-selling rule for financial stocks.
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With the US financial world topsy turvy and with its jewels up for sale at fire prices all eyes on Monday will be on the US Congress and its political games in ratifying the Treasury's Troubled Asset Relief Program (TARP). This is not the time for games and details are very important. The money market is broken and on this milieu, currencies took a back seat to other asset classes. The dollar is lacking much direction, but given the illiquid trading conditions and the ratification of the TARP, its bias is up.
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