Why the Dollar Is Rallying

After hitting a record low against the Euro on Tuesday, there has been little follow through selling in the US dollar, leaving many traders wondering whether this may be a pause before further losses or a potential bottom.

Although I am a long term dollar bear, the break of 1.60 is far from impressive. This indicates that there isn’t much speculative interest in taking the Euro higher in the near term, especially as economic data and official comments start to turn against the Euro and in favor of the US dollar.

Earlier this week we had better than expected US housing market numbers. I would not be surprised to also see a recovery in new home sales. Even though US durable goods will be pressured by the sales of furniture and electronics, Boeing’s incredibly solid end of quarter earnings and their expectations of another strong year suggests that sales of non-defense aircraft could be firm.

As for the Eurozone, we expect German business confidence to deteriorate materially.

Fed fund futures are currently pricing in an 82 percent chance of a quarter point rate cut next week with the remaining 18 percent probability in favor of no rate cut at all. This is a sharp departure from just a week ago when the market was pricing in a 76 percent chance of a 25bp cut and a 24 percent chance of a 50bp cut. The only reason for this dramatic shift in expectations is the increased inflationary pressures.

A week ago, oil prices were trading at $113 a barrel and yesterday it hit an intraday high of $119.90 a barrel.

The dollar should continue to recover for the rest of the week, but the party may end the following week when we have the Federal Reserve interest rate decision and non-farm payrolls due for release. I believe that the market may be under pricing the degree of Fed rate cuts because the problems in the US economy are far from over. Non-farm payrolls should continue to drop while consumer spending will probably slow, leaving the Federal Reserve with a lot of work ahead of them.

Comments

[AmesTiedeman]

Wake up. This so-called rally will not hold. The current account is -800 billion. No currency remains strong with that negative a number. We traded ourselves to ruin.

[buyitcheap]

To stop this outlandish ramp in commodity prices, the dollar must be defended and rates increased or held steady.

[Coelacanth]

I agree the dollar will be under re-newed pressure next week.

It's telling though that the dollar is holding up relatively well today after the atrocious new home sales numbers for March. Maybe the buck is being bouyed a little by the durable goods number (ex-transportation) and lower than expected jobless claims. Germany's lower IFO read last night is probably helping too.

[sorgmot]

I am looking at 1976 to 2008 chart of the number of USA dollars that one Swiss Franc(CME) would buy. It runs up from $0.40 in '76 to $1.00 now. I remember the exchange rate at $0.25/CME in 1955. Your can see the graph if you visit
financialtrax.googlepa...
and click on commodities
and then click on Moore
and then click on Swiss Franc.

The CME buying power for US$ ran up in the 60's and 70's as the USA went through stagflation. It peaked in 1978 and fell until 1985 as the USA ran interest rates up while Volker ran the Federal Reserve Bank.

Then, Greenspan took over the FRB and USA interest rates fell and fell and fell until 1996 and the CME went up and up and up to $0.90 at that time.

USA interest rate increases in 1996 to 2000 took the CME back down to $0.60 by 2000.

USA interest rate cutes from 2001 to 2007 took the CME back up to $1.00.

As 2008 progresses, the USA has little reason to defend the $US. Lower USA interest rates are in order to stimulate the economy and inflate USA asset prices up past the prices they have recently sunk to due to the failing economy. Saving USA banks is the first goal of the RRB.

Foreign nations have little reason to run the value of their currencies down against the $US since doing so would increase the oil costs and the costs of base commodities imported from the USA. They have and will continue to take costs out of the products they export to the USA and the world.

Foreigners have little reason to hold $US or invest in the USA except in raw material companies. Thus, they will continue to sell $US by selling $US bonds for their own currencies like EURO's or money substitutes like gold.

Meanwhile the USA FED will be holding short interest rates down to fight the US real asset value collapse now under way.

The CME could finish Elliot wave five of the long post World Was II upward wave at $1.20 in 2009 or later.

[John Egan]

Just like to add that I listened in on Ms. Lien's webcast on TD Ameritrade and found her to be very articulate.... Also, I did run a backtest on StrategyDesk based on her MACD model (as outlined in her new book..) and found that it actually provided pretty good results without any tweaking.. I'd suggest using some other means of exiting on StrategyDesk for better results.. But impressive non-the-less.

Thx jegan ;-)

[SageNot]

Hmmmmmmmmmm, I have a two'fer today. Bill Miller WISHES that Bear Stears ended this crisis, no wonder his clients are leaving him in droves!

With gold & other precious metals NOT continuing to rise, even as Crude Oil & Natural Gas rallied more, not to mention the AGs runup until today, I'd say that the Central Banks have spooked the Dollar Bears, big time!

Will it last, ask Bill Miller, heh-heh?

[fodi MD.]

GOLD is held down with the gold carry trade ,Central banks and Bullion banks for now.The same gold is borrowed, leased ,purchesed and sold over and over again.Oil is a free market comodity, it has ups and downs of speculation but the price is determined by supply and demand.

[AmesTiedeman]

The Dollar rally will be narrow and short lived. You will not see 1.30 on the Euro. Maybe 1.50.