Earlier this week, the Federal Reserve surprised equity markets by launching a new weapon against the mortgage meltdown and the resulting credit crisis. The "Term Securities Lending Facility," whereby Treasury bonds will be lent to institutions for 28 days, using mortgage-backed securities as collateral, aims to more precisely inject liquidity into an essentially frozen marketplace. At a price tag of $200 billion, this move represents one potentially expensive banker bailout.
The novelty of the approach was enough to spark a 400-point rally in the Dow on Tuesday, but currency traders were not so impressed. The collateral damage from Tuesday's surge hurt the greenback itself, as the U.S. Dollar Index sank to fresh new lows. While the Fed is only accepting highly rated debt as collateral, recent events have shaken investor confidence in the accuracy of such risk ratings.
As of this writing, Bear Stearns (NYSE: BSC ) is roiling the markets with news of its liquidity shortfall, dragging shares of Lehman Brothers (NYSE: LEH ) and Citigroup (NYSE: C ) in tow. The Fed has wasted no time indicating that it will open the cash spigots again.
If this is a sign of things to come from the lender of last resort, the dollar's trajectory has been foretold. The wise Fool will be watching the financial sector carefully, tracking the actions of the Fed and its effects upon the U.S. dollar.