Dollar Index: Ahead Of The G20

The dollar index was down nearly 3% in March as stocks enjoyed their best month since 2002, but it's up more than 5% for the quarter as stocks remain lower for the year.

Still, concerns about the financial sector and signs of rising tensions ahead of Thursday's G20 summit meeting could limit downside potential for the dollar which as we've seen, tends to gain against the higher-yielding euro, pound and aussie (while it declines against the yen) as investors flee from riskier equity positions.

Because the market has little expectation of hearing something positive out of the meeting, a surprise therefore has the potential to move things to the upside rather quickly.

The G20 is expected to emphasize a plan to tighten regulations for firms large enough pose a systemic risk but France has called for a global financial regulator, an idea opposed by the United States and Britain. Leaked drafts of the final G20 joint statement indicated that the focus will be on lauding stimulus measures already taken while leaving open the door to further action if needed, which means to not expect any intentions to boost spending by European nations.

The main thing concerning investors is to see a repeat of the London Economic Conference of 1933. That meeting of policy-makers from 66 nations in the middle of the Great Depression ended in acrimony, leaving the world's largest economies going their separate ways.

On Tuesday, the dollar index fell 38.4 basis points (-0.45%) to 85.485 as first S&P futures and then the cash markets rose on the day.

Financial Sector: Bill Gross On The Dollar...France Out Of G20?...Bailout Cost Near 2008 GDP

Bill Gross was out this morning with an outlook called The Future Of Investing, a top-down analysis that sees the global economy likely dominated by delevering, deglobalization, and reregulating.

“There is a near certain probability that the financially based global economy of the past half-century will not return,” Gross wrote. “Nor will we experience the steroid-driven growth excesses that it facilitated.”

As these changes occur they will inevitably lead to slow global growth, a heightened risk aversion, a distrust of conventional investment model portfolios, and a greater emphasis on surviving as opposed to thriving.

Global growth rates will slow as household and business balance sheets shrink and place a smaller emphasis on borrowing to boost returns, he wrote. Profits helped by world trade will slow as policy makers increase regulation and support less-open markets in an effort to support domestic auto and banking sectors, according to Gross.

As a result, the dollar will likely weaken, credit spreads will widen from historical lows and credit ratings in emerging markets like Eastern Europe will return from “unrealistic levels.

Emerging market globalization and lax lending standards re-rated emerging and developing country financial markets to unrealistic levels. Eastern Europe is likely the first to fall, said Gross.

The bull market of recent vintage depended on leverage, deregulation and globalization that proved unsustainable in its excesses, he wrote. Investors will need to adjust to a new reality that is dependent upon bear-market delevering and debt liquidation to deliver us to our new and ultimate restructured destination.

The bull markets as we’ve known them are over, said Gross.

French President Nicolas Sarkozy will walk out of this week’s Group of 20 summit if his push for stricter financial regulation flops, Finance Minister Christine Lagarde told the BBC.

Sarkozy will refuse to sign any statement if he feels “the deliverables are not there,” Lagarde said in the interview. “I think he is very determined.”

U.K. Prime Minister Gordon Brown, the meeting's host, said today that the talks must deliver “oxygen of confidence” to the world economy after saying yesterday that a deal among the leaders will “not be easy.”

In a working paper released last week, the G20 recommended that their leaders agree to regulate hedge funds and other non-banking pools of capital that pose “systemic” risks to financial systems.

An interesting article from Bloomberg makes the point that in the effort to stem the worst financial crisis since the Great Depression, the U.S. government and the Federal Reserve have spent, lent or guaranteed $12.8 trillion, an amount that approaches the nation's 2008 economic output (GDP).

The money works out to $42,105 for every man, woman and child in the U.S. and 14 times the $899.8 billion of currency in circulation. The nation’s gross domestic product was $14.2 trillion in 2008.

The following is a table that outlines what's been done over the past 20 months:

--- Amounts (Billions)---
Limit Current
Total $12,798.14 $4,169.71
Federal Reserve Total $7,765.64 $1,678.71

FDIC Total $2,038.50 $357.50
Treasury Total $2,694.00 $1,833.50
HUD Total $300.00 $300.00

On Tuesday, the XLF financial sector ETF rose 0.46 points (5.51%) to 8.81. The volume was moderate; 243,508,625 ETF's changed hands against a rising daily average of 236,197,000.