Federal Reserve officials are out in force trying to pacify the market after the Euro and sterling hit a new record high on the back of sharp dollar weakness. Philadelphia Fed President Plosser and Governor Warsh downplayed the impact of the problems in the sub-prime sector with Plosser repeating the Fed’s general belief that economic growth will recover in the second half. The US dollar has been falling partly due to Collateralized debt obligations (CDO) scam. Collateralized debt obligations, or CDOs, are complex bonds that repackage pieces of other loans, including "subprime" mortgages granted to borrowers with weak credit. CDOs typically are corporate obligations, such as pools of loans and bonds that are packaged into securities for institutional investors. Wall Street banks invigorated demand for CDOs by slicing them into a broad range of risk. That structure allows investors to pinpoint the amount of risk they are willing to stomach. These investments could hurt profits at Merrill Lynch & Co. Inc. and other Wall Street companies. CDO-related activity could shave about $132 million, or 1.6 percent, off Merrill's 2007 expected net income of $7.85 billion. Moreover, Standard & Poor's Rating Services on Tuesday slapped a negative view on about $12 billion of rated mortgage securities tied to subprime loans. The losses on mortgages packaged into securities by leading U.S. investment banks continue to exceed historical precedents and the rating agency's initial expectations, S&P said. Earlier this year, Merrill Lynch Chief Financial Officer downplayed the impact of subprime and CDO activities, saying they accounted for less than 1% of the company's total net revenue. Outstanding U.S. CDO volume is an estimated $900 billion. CDO investments with high leverage recently buckled two hedge funds at Bear Stearns, forcing the investment bank to commit more than $1 billion in a hastily arranged bailout. Meanwhile, there are a growing number of U.S. homeowners with weak credit that are missing payments or defaulting on their mortgages hurts the value of CDO investments tied to subprime loans.
Credit Suisse recently estimated banks could lose between $26 billion and $52 billion over time because of their exposure to CDOs. The top 10 global investment banks could absorb that type of loss without a calamity because they have more than $500 billion in equity capital, Credit Suisse said. Potential CDO-related losses are hard to calculate and could be much larger than what analysts expect because of the heavy involvement of secretive hedge funds.
CDO investments can be scary because they are complex and hard to value, putting a lot of faith on assumptions that may not stand up. And like a custom-made suit, they are tailored for specific investors who may have hard time finding a buyer in a souring market. The US equity markets are rising due to better than expected corporate results and continued mergers and acquisitions news. All news that are coming from US companies are positive and there not been any series of bad news from US companies and/or otherwise. Further carry traders can back with a bang and pared all their previous day losses. As long as carry traders are alive, neither US equity markets will fall nor the precious metals and base metals and energies in the short term. EFFECT ON THE US DOLLAR AND GOLD The US Dollar can fall further as it has dented investor confidence. However since it has already fallen, it remains to be seen how long can the greenback fall without a correction. Sooner than later, central banks are going to start murmuring openly over their currency gains affecting exports. The left over confidence over the US dollar has been shattered and it will be very difficult to repair the same, despite short term corrections. However I was amazed that the European Central Bank is not worried about the current level of the Euro. ECB President Trichet said in a speech hat inflation risks are to the upside and even after the recent rate hikes, monetary policy is still accommodative. Gold and other precious metals will definitely due to the CDO scam which should result in most of the analysts upgrading their 2007 close targets. | 
