Liquidity crunch poses threat to dollar-denominated world

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Less-than-horrible earnings from big US banks are contributing to this week's sense of optimism, but economists caution that this is a false dawn. While stocks recover, credit-default swaps for US financials continue to rise, indicating that bond traders don't yet see the light at the end of the tunnel. Keep in mind also that limits on short-selling by the SEC may be preventing US stock prices from serving as an accurate barometer of investor sentiment.

While oil has become the focus, many economists caution to keep our eyes on the ball: the center of this crisis - the worst since the Great Depression -- is not in oil markets, but in the US housing market. Prices there keep falling, putting increasing pressure on US consumers, lenders and by extension on US companies. Some analysts, however, caution that the extent of this week's rally in emerging markets will depend to a large extent on how much oil recovers from last week's plunge. If it bounces back too strongly, sentiment in emerging markets will suffer. So far, though, the dollar's retreat in recent days would seem to indicate a push into non-US markets.

In other news, Dubai World's property arm, Limitless, has apparently raised its offer for London property company Minerva to 260 million pounds. Such investments provide important liquidity into a global credit market suffering from short supply of it. While cash still appears to be in ready supply in the Gulf, however, there are signs that the global liquidity crunch is starting to wash up here. Project finance is reportedly growing harder to come by, particularly as lenders gauge the likelihood of a currency revaluation. With many loans made in US$, local lenders are apparently concerned that they may end up on the short end of the stick.