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On Friday, in my Daily Currency focus for FX360.com, I talked about the 3 Big Threats to the US dollar this week. One of them was a bad bank plan. This morning, Dow futures and higher yielding currencies are up sharply on news that Obama’s Administration has prepared a plan to create a bank that would absorb toxic bank assets. Here’s a recap of what I wrote on the plan and read the rest of the report for the other 2 major threats facing the US dollar.
Bad Bank Plan – There is no question that equities are still leading currencies for the time being and over the next few weeks, the Obama Administration could announce a plan to create an “aggregator bank” that would soak up the bad debt sitting on bank balance sheets. This would free up capital for the banks which would hopefully encourage lending and restore investor confidence. If Obama announces a bad bank plan, it could squeeze shorts in financial stocks and take the entire index higher. Since currencies are still moving in lockstep with equities, a rebound in stocks could help reduce risk aversion and take some of the steam out of dollar rally.