Dollar Rally Should Continue As Recession Reality Sets In

Fresh concerns about the global economy have triggered sharp gains in the US dollar and the Japanese yen. Risk aversion continues to seep through the markets as the National Bureau of Economic Research finally admits that the US economy fell into recession in December 2007. The first trading day of the last month in the year has been exceptionally brutal with the Dow Jones Industrial Average falling more than 635 points or 7 percent. Even President Elect Barack Obama’s nomination of Hillary Clinton as Secretary of State has failed to help the markets.

Dollar Remains the Safe Haven Play, Bernanke Signals More Rate Cuts

There is no question that the meltdown in the equity market singlehandedly triggered the sell-off in the currency market Monday. Most people knew that the US economy was already in recession, but as reality hits with the official NBER announcement, investors bailed out of equities once again. In fact, we have seen a global flight to safety with stock exchanges across Europe slipping more than 5 percent. The flight to safety has led to repatriation back into US dollars even though there is still more trouble ahead for the US economy. On a day when manufacturing indexes across the globe hit decade to record lows, the US Federal Reserve was the only central bank to offer practical reassurance. Fed Chairman Ben Bernanke said in a speech Monday that further interest rate cuts are certainly feasible and even though their scope for conventional rate policy is limited, their other options include buying long term Treasuries or agency securities in substantial quantities.

Cyber Monday May Not Save the US Economy

Investors are looking to Cyber Monday in the hopes that retail sales may support the economy but even if consumers spent more this year than last, it is a result of discounts rather than underlying demand. Foot-traffic at the nation’s retailers on Black Friday was stronger than expected but many forecast that because the discounts were so deep this season, often reaching more than 50%, increased sales will not transfer into strong profits. The shopping event that transpired last Friday was more of an act of desperation by retailers than anything else. Industry groups, such as the National Retail Federation, note that weekend traffic fell-off significantly as buyers felt satisfied that they took advantage of all available discounts during Friday’s rush. In addition, more shoppers indicated that they were already done with their holiday shopping this year than last. Buyers also specified that gift purchases will be constrained to the younger audience, with older friends and family agreeing to forgo adult gifts. This type of behavior suggests that the momentum may be difficult to sustain for the remainder of the month.

Dollar Rally Should Continue

This is the week where the problems in the US economy will come to the forefront as reality sets in and investors realize the US is still in big trouble. If the data is as bad as we expect, the dollar rally should continue. We said often that recession trades such as short EUR/JPY and USD/JPY should thrive in this current environment and that is exactly what we have seen today. Contributing to the sell-off in US equities was the ISM manufacturing report which fell to a 26 year low. Every single subcomponent of the report either declined or remained unchanged with big drops seen in the prices paid and employment components. As the week progresses, we will be looking at the leading indicators for non-farm payrolls for clues on the degree of job losses in the month of November. The manufacturing ISM report suggests that the sector will see its 29th consecutive month of job losses. The fate of the Big 3 automakers will play a central role in determining whether this continues.

Comments

[BobTrader]

And I think once the holiday season is over, and reality sets in to the retail sector, it will get much worse. This is only the beginning.

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2008 Dec 02 11:33 AM

[MattyNyse]

Short term rally in the dollar. Don't get to comfortable, Gold is still the safest haven.....

2008 Dec 02 11:46 AM

[sheridan]

The dollar is not going up because it is a safe haven!
It is a result of forced liquidation.
We're the largest debtor nation in the history of the world.
This will continue for the short term but be ready to short the dollar again once the trend changes- Dollar is doomed!!!!!!!!!!!!!!!!...

2008 Dec 02 12:49 PM

[Socialism cannot compete!]

Are you kidding? Dollar a safe-haven? And the dollar rally should continue?? Get back on your meds!! We're printing dollars left and right! The Fed has taken rates about as low as they can, whereas foreign centrals have MUCH more room left to cut. They will call our debt and use that as their springboard outta this mess. We will hyper-inflate our way out, as is already in progress. The smart foreign nations are already beginning their moves into gold -- read up on the Saudis and Iran in that regard (P.S. -- not that I think Iran has much else in the way of smarts...but OPEC nations going to gold instead of dollars should be a clue to us!!)

2008 Dec 02 03:18 PM

[MattyNyse]

Exactly


On Dec 02 12:49 PM psheridan wrote:

> The dollar is not going up because it is a safe haven!
> It is a result of forced liquidation.
> We're the largest debtor nation in the history of the world.
> This will continue for the short term but be ready to short the dollar
> again once the trend changes- Dollar is doomed!!!!!!!!!!!!!!!!...

2008 Dec 02 03:58 PM

[puddytat]

Love it... Finally some bloggers who have got their heads screwed on straight. All of you are 100% bang on. US is in a death or should I write debt spiral with ever increasing amounts of debt per second. Your debt to gdp ratio is in the toilet BELOW what it was during the so called great depression. Dollar is not a safe haven whatsoever... perhaps a sucker rally.... GOLD ....good ... very good,.... US is at a second level insolvency where the cupboards are bare and now you are forced to sell the cupboards...Holiday season over.... carnage will begin...
Nice to see that there are some Americans with tons of smarts ... always what I regarded as a smart nation... Your Government... not so much.
Hey ours in no screaming hell either..
What do you folks recommend as far as gold... the bullion or the gold stocks or ETF??

2008 Dec 03 09:17 AM

[Asbytec]

Well, Kathy does actually get paid to crunch the numbers. I wouldn't write her opinions off as amateur.

2008 Dec 03 08:21 PM

[EUARTE]

What ever the reasons for this horrid economy, I am fine. Why? I live in Brasil where nothing was going to be affected by the American and EU problems. Lula got bad advice on that one. The credit crunch has arrived. I now get over 30% more R$s than before. The worse the news from home the better for me. Life is wierd.
I just can not figure on how I will survive when the dollar dives for the ocean bottom.

2008 Dec 03 09:19 PM