Marc Faber expresses his views on the inverse relationship between the USD and market liquidity in the short video clip below.

The unintended consequences of extraordinary monetary measures

The Australian to Singapore dollar exchange rate has fallen sharply from almost 1.29 to 1.16 from April till now. It’s fall reflects a change in mood, as the Australian dollar is an indicator of global risk appetite.

Often, you will see a correlation of the Australian dollar with other risk assets (eg equity markets) due to the carry-trade.

In a carry-trade, people borrow in low interest currencies (eg US, Eur) and invest in currencies with better interest rates (eg Aus). The carry-trade in the Australia dollar has been at very high levels just prior to the plunge.

When volatility is high and there is uncertainty in the markets, many people will unwind their carry-trade by selling their Aussie to buy back their funding currency. The pace of this unwinding has lead to a sharp drop in the value of the Aussie dollar.

In the space of a few weeks, market sentiment has also changed completely. There is now heightened awareness of the problems facing Europe, which cannot be discounted simply as a Greece problem. The sovereign debt is weighing heavily on the balance sheet of some European banks, and we have just seen bailouts of a couple of Spanish banks. Will this be the start of more to come?

And the tensions in the Korean peninsula does not help.

I like to invest when sentiment is bad (as I can pick up cheap assets) but at this moment, I am just going to sit around to watch the events unfold.

There is a time to invest and there is a time to wait – and waiting is often the hardest thing to do for most investors.

The situation is quite interesting when people approach me about investing their money one or two months back and I had to tell them that it’s probably better to wait.

On the other hand, most people will shy away when I mention that it’s a good time to invest (when things are ridiculously cheap). Oh well….

In an April 2010 report, the Swiss-based Bank for International Settlements (BIS), a clearinghouse for world’s central banks – reviews central bank data and reveals the countries that are the most exposed to European turmoil, specifically in their banking systems.

The numbers presented here take into account foreign claims – investments in the form of loans and bonds that have arisen from PIIGS nations – that are held by international banks headquartered outside the individual countries.

Figures below are reproduced from a compilation by CNBC. Note that the exposure numbers only include data from international banks, and does not account for insurance companies or other financial firms.

All figures in millions. (Click on figure to see enlargement)

In a turbulent day on Wall Street, the Dow Jones industrials lost almost 1,000 points, nearly a tenth of their value, in less than half an hour.

It was believed that a simple typographical error in one of the orders had triggered a wave of computerized selloff.

The Dow was down 400 points at 10,460 before it tumbled almost 600 points in seven minutes to its low of the day of 9,869, a drop of 9.2 percent. It was the biggest drop ever during a trading day.

Then the market bounced back, rising almost as quickly as it fell. Within an hour, the Dow had regained 700 points. The trading day ended with the Dow down 347.80, or 3.2 percent, at 10,520. This was still the biggest point loss since February of last year.

With events in Eurozone weighing on everybody’s mind, market sentiment has been getting a bit shaky recently.

I don’t think we are going to see a near term solution to Europe’s problem and I have been less than optimistic about the equity markets ever since the end of last year.

Any proposed bailout is only but a stopgap solution (if it ever goes through) and one way or another, Greek bond holders will end up having to pay the price.

Ultimately I think Greece will have to leave the Eurozone, or Euro will have to be greatly devalued (which is happening slowly now).

Warren Buffet was recently interviewed on CNBC about his thoughts on Goldman Sachs and the state of the U.S. economic recovery.

You can watch the full interview in two parts below. If you prefer reading, the transcript can be found here.