By Chris Gaffney, CFA

As you can imagine, traders are once again shying away from the risky assets (i.e. high-yielding currencies, emerging markets, etc), now that Lehman is filing Chapter 11. And because risk aversion is a popular theme again, traders are buying low-risk U.S. treasuries. This wholesale U.S. treasury buying is actually stopping the U.S. dollar from falling further.

The best performers over the weekend were the Japanese yen and Swiss franc – both traditional funding currencies for the carry trade.

As my colleagues have explained several times in the past, carry trades are only profitable when markets are relatively calm. So traders typically exit their carry trades when market volatility increases. 

The reversal of the carry trades means investors sell their high-yielding assets and use the funds to pay back loans they took out to buy low-yielding 'funding' currencies like the Japanese yen and Swiss franc. The Japanese yen strengthened as much as 3.4% vs. the U.S. dollar overnight, and the Swiss franc had the biggest one day gain in six months.

I have to say I’m surprised Treasury Secretary Paulson didn’t bailout another bunch of his Wall Street buddies. Paulson said Wall Street has been aware of Lehman's troubles for a long time, so he had plenty of time to prepare for any crisis at the company – yet he did nothing. I know EverBank closed out all of our currency trades with Lehman a couple of months ago, and hopefully most other prudent companies did the same.

I hope this weekend's events are an indication that some sanity has returned to the Treasury department. I want to believe Paulson and Co. have finally drawn a line after the widest expansion of federal safety nets since the Great Depression. It’s about time we quit guaranteeing the losses at these huge financial firms.