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Traders and other market participants were looking for relief - or at least a sense of clarity - from the G20 meeting last week. For the US dollar, the stakes were especially high.

The Economy And The Credit Market

Traders and other market participants were looking for relief - or at least a sense of clarity - from the G20 meeting last week. For the US dollar, the stakes were especially high. American policy officials have gone out on a ledge in an attempt to turn a domestic recession around; but their efforts are clearly falling short as consumers, businesses and financial institutions realize the crisis is a global one. The best outcome for the summit in London would have been a clear set of actionable steps that would have spread the responsibility for recharging the global economy amongst the world's largest nations. While the language of the statement was convincing, a critical review suggests a lack of responsibility and time line will inevitably render the promises made ineffective. This leaves the dollar at the mercy of speculation over its role as a safe haven and the potential for its economic slump to devolve into a depression. Considering the jump in the unemployment rate to a quarter century high and the dour forecast from the FOMC statement, it is difficult to locate the dollar's good qualities.

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A Closer Look At Financial And Consumer Conditions

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Financial market conditions continue to show general improvement. However, participants are still clearly on edge; and this fragile rebound for confidence in the system could quickly come crashing down should another crisis point develop. This is no doubt the concern of both the Federal Reserve and Treasury Department. It has been suggested that the government will delay the results of its stress test of the United States' 19 largest banks until after earnings season to avoid an adverse market reaction. And, in their statement, the FOMC said credit remained very tight, financial markets were fragile and unsettled, and pressure was intensifying.

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For months, investors and traders have more-or-less overlooked the general health of the US economy. This has been the case because either its global counterparts were in worse shape or demand for liquidity drew capital into the deep end of the market's pool. However, with fear of liquidity letting up and other governments ramping up fiscal stimulus, the American economy and currency may lose its appeal. And, considering the bearing on economic trends, the future is dimming for the dollar. Last week, NFPs plunged another 663,000 - boosting joblessness to 8.5 percent. This may end up producing what the Fed calls a ‘feedback effect.'

The Financial And Capital Markets

The financial markets seemed to respond positively to the G20's list of initiatives last week; and it comes as little surprise. Heading into the summit, US equities and commodities were set within a steady advance. As such, the market was merely reacting to the questionable event through its natural bias. However, true investment conditions have not improved with meeting of the world's most powerful. The commitments made are merely promises for action until nations actually institute the steps drawn up in the statement; and considering the state of individual economies, few will be eager to reroute vital aid away from the domestic fire in order to help extinguish a much bigger financial fire. In the meantime, the capital pool and potential for returns from US assets continue to shrink. Consumer spending threatens to drive the world's largest economy into a true depression, while the government runs out of options.

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A Closer Look At Market Conditions

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Capital markets are still attempting to forge ahead with their bear market rallies; but the weight of the situation is starting to get the better of sentiment. For equities, investors are beginning to realize that traditional market valuations (like the P/E ratio) are gauges that are relative. And, considering the economy is suffering its worst slump since the Great Depression, it pays to be extra cautious. As for commodities, a rebound in price must be sustained through a genuine shift in the balance of supply and demand. Thus, while funds may seek safety in the form of physical assets, the impact on price will not be as lasting as a true recovery in growth and demand.

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General risk appetite is perhaps the most influential market dynamic in an environment where expansion and investment are left in limbo. It has been said before that we are suffering from a crisis of confidence. However, that is not necessarily true. While sentiment in the market is dour - and no doubt contributing to the difficulty in freeing up the credit markets and spurring a genuine rebound in investment - it is also rooted in objective fundamentals. Yields on assets are near recent historical lows, credit is frozen despite the Fed's efforts to provide liquidity and the economy is in its worst state in decades. Even a bullish outlook for returns can't make up for that kind of risk.

Questions? Comments? You can send them to John at jkicklighter@dailyfx.com.