Why US Interest Rates and the US Dollar Will Continue to Fall

The dead cat bounce in the US dollar that I was looking for this week did not last long. The combination of weaker US economic data and stronger Eurozone data has taken the Euro to a high of 1.5760. For those of you who had access to my economic data calls, I was looking for German IFO to beat expectations because the flash estimates of manufacturing and service sector PMI in Germany both reported improved business conditions in the month of March.

If business activity was stronger, there was a slim chance that business confidence would be weaker. The market or bank analysts in particular are notoriously wrong about predicting German business confidence. They have a preconceived notion that a strong Euro, slower US growth and high interest rates will make business less optimistic. But if the numbers do not indicate that growth in Germany is slowing, then we shouldn’t assume so.

The Godfather Says Don’t Bother

French President Sarkozy said that France and the UK should join forces to pressure the US into strengthening the dollar. There is zero chance that the US will be bowing to these pressures especially without a similar call from ECB President Trichet.

At DailyFX, we call Trichet the Godfather because he never wavers on criticism or pressure from politicians and reporters. His word is generally as good as gold. This is why when Trichet said this morning that “there is no need to change the framework due to market turmoil,” Euro traders quickly shrugged off the complaints from Sarkozy.

The US needs a weaker dollar to spur growth, just as much as the Eurozone needs a stronger Euro to curb inflation.

US Data Continues to Weaken

In contrast to the stronger German IFO report and Eurozone Industrial Orders, Durable Goods in the US plummeted. The monthly decline for February was the largest on record. Even new home sales fell to a 13 year low with average prices declining from $250,800 to $244,100. The housing market is trouble which means that the Federal Reserve still has a lot of work to do.

Expect interest rates to fall below 2 percent in the next 3 months.

Comments

[User 168566]

A) The U.S. needs to crash to correct the irresponsible use of credit by consumers and the irrational extending of credit by financial institutions.
B) The FEDs work to date seems to have not helped Americans (i.e. the $240 billion cash injection that will only serve to extend this credit bubble and buy time for banks to get their investments out). Further work done by them that will help Americans seems questionable.

As I see it, the American public, who cannot even pay their individual consumer debts, will eventually have to foot the bill that the worst administration in history has racked up ($10 trillion now?). Raising taxes to service the debt seems tricky with a broke public heading into a recession. So then what? Print money, probably. Goodbye dollar! Stagflation could be a term spoke about a lot in the next couple of years for your country.

Suggestion: Go north to Canada :) You pretty much own us anyways and there is some growth here in the West.

[e-mail]

[DanielEbrahimi(Analyst)]

The downturn in our securities and housing market is exacerbated by the decrease in our FX market. We can no longer rely on unlimited cross-border capital in flows to finance consumer spending. Those economies with current account surplus currencies relative to current account deficit currencies will thrive in this risk adverse economic climate. Surplus currencies such as the Taiwanese dollar, the Malaysian ringgit and the Singapore dollar have seen significant increases, while the underperformance of such currencies as the Turkish lira, the South African rand and the U.S. dollar has experienced steep declines.

[redriver]

Why are Canadians flush with cash?

PS to user 168566.
Yep its screwed up but, it (living beyond our means) has been injected into every aspect of our lives over the last 20 years. We're just now facing the music. So, its "we the people" who are at fault. We elect though apathy "politicians"... not leaders who then do relatively nothing as to their job which is to protect the health, safety and welfare of the people. So, as the old saying goes, "in a democracy you get what you deserve". Our representatives are just that, representative - of us.

[sedek]

"The US needs a weaker dollar to spur growth, just as much as the Eurozone needs a stronger Euro to curb inflation."

All the weaker Dollar has spurred is commodity inflation and profits for Euro and commodity longs. It's been a disaster for the economy and for wae slaves, whose paychecks will always fall short of inflation, which means their buying power is constricted by higgh energy and grocery prices. FOMC should start raising rates, now.

Rest of the article is good.