Credit crunch - what the hell is going on?

[phreak]

I hope somebody can clarify this: credit crunch has started in US and hence US should be affected by it more than any other country. A cut in interest rates is now widely expected in US by the end of the year due to this issue. How come that dollar is up against Euro and Cable and is seen by traders as 'safe heaven'? Any ideas?

[tshesse]

look at the JPY

[Rhody Trader]

Actually, from what I heard the instigatation of this credit crunch - the one that got all the central banks pumping money into the system over the last week - was in Europe before the US open last Thursday. The feeling is that a lot of Europeans (and others) bought a considerable amount of the subprime related paper, and so they are just as tied in to this whole supposedly US-only problem. It's a global issue because risk is now distributed around the world and not just locally.

The dollar, though, is on the rise because of the flight to quality in to US Treasuries, especially T-Bills. The 3mo Bill has been down 150+ basis points over the last couple of weeks. That's going from 5% to 3.5%, which is a HUGE move. That means lots of money pouring in to the short end of the yield curve. Buying Treasuries requires aquiring USD to do so.