The Push for a Stronger Dollar

Yesterday I posted an article saying to watch out for Bernanke’s speech as that was likely to support the US dollar. Indeed, the dollar surged strongly against major currencies such as the Euro and Swiss franc after Bernanke unexpectedly revealed some optimism in his speech. He said the economic outlook has improved from a month ago and pledged that central bankers will fight any increase in inflation expectations. “The risk that the economy has entered a substantial downturn appears to have diminished over the past month or so,” he said.

Frankly, no one really expected him to say that about the current state of the US economy as he has always emphasized that there are great downside risks to the economy (he still does). The US dollar also has gotten a second round of renewed support from US Treasury Secretary Paulson who said yesterday and repeated today that he does not rule out currency intervention, saying that “I never like to say never”.

For so long, the financial markets haven’t been reminded about the topic of currency market intervention because nothing much about it was said by high-ranking policymakers. And now, Paulson’s assertions of “I never like to say never” are bringing more power to Bernanke and Bush’s words that they would like to see a strong dollar. Paulson also said that economic fundamentals are sound and “those long-term fundamentals are going to be reflected in our currency value”.

While I don’t see the Treasury intervening to buy up dollars, the collective intentions of Paulson, Bernanke and Bush are very clear: They would like to see a stronger dollar. There is now an increased likelihood of currency traders closing their short USD positions, and for the USD to appreciate higher in the near to medium-term.

More USD-Supportive Comments

Dallas Fed’s Fisher said inflation must be controlled, and he would rather risk weaker growth for some time if that helps keep inflation expectations under control. He said the Fed drew the rate cut line at 2% but he would have done it at a much higher level. He expects the US economy to be sluggish for a period. Retiring Fed’s Mishkin also talked about inflation risks, saying that inflation expectations are important for policy.

US Trade Gap Widens

The US trade deficit widened in April by 7.8% to $60.9 billion, more than the $60 billion gap predicted, making it the widest gap since March 2007. Imports rose to a record $216.4 billion as prices of imported petroleum surged ($96.81 a barrel) and the total amount of fuel bought rose to another record too. Exports also rose the most since February 2004, to a record $155.5 billion, due to demand for commercial aircraft, autos and agricultural machinery.

We could expect to see a further widening of the deficit in the coming months as oil prices rise even though exports continue to do very well. The weaker dollar is no longer as important a trump card for the US as its benefits are beginning to be outweighed by the inversely correlated rise in oil prices. No wonder Bernanke & Co are beginning to show signs of concern for the currency.

Forex Trading

EUR/USD fell nearly 200 pips to a low of 1.5460. Potential bear targets are 1.5430, 1.5400, 1.5360-70. USD/CHF’s nearest resistance is 1.0420-30 and Swiss bulls may target 1.0500 in the near-term. The British pound fell sharply against the US dollar today as the RICS report showed that house sales in the UK fell to a 30-year low in May. GBP/USD fell more than 200 pips to an intraday low of 1.9530, close to erasing the gains made from the past three days.

Wednesday:

UK trade balance, claimant count 0830 GMT

US MBA mortgage applications 1100 GMT

Canada new house price index 1230 GMT

Fed’s Kohn speaks on inflation 1530 GMT

US Fed’s Beige Book 1800 GMT

Comments

[Reinko:]

It is a habit of this Republican governemnt (not that the Democrats are much better) of stating that the fundamentals of the US economy are 'strong' or 'good'.

But they never ever name one of those fundamentals.....

Only Dubya lately came up with a 'good fundamental', namely exports were up.
Yeah yeah, it's only up because of the weak dollar.

Lets look at another fundamental: Worker productivity is still up year on year.
Hmmm, interesting; here in Holland minimum wages are about 10 US$/hour while in the US it is only 6 to 7 dollar. So simply on the minimum wages jobs there has to be about 50% more worker productivity to get the same worker productivity as in Europe.

No, the only fundamental that is better is unemployment. Indeed it is much lower in the USA compared to Europe.
But if you live in the USA and you only have a 40 hours the week minimum wage job, your standard of living is below that of an unemployed in Europe.

Of course the Americans will argue: Here are the taxes far lower!
Ok, they are lower, that is true. But the US economy has over 50 trillion of debt on herself and at a reasonable level of interest, say 5%, there would be 2500 billion needed a year just to pay for the interest. That is about the same amount as the US government takes in as revenue.

So Republicans, I dare you:

Bring up those so called strong fundamentals!

2008 Jun 10 03:10 PM

[icandoitdon:]

bush and bernake would like a strong dollar.

i'd like someone to give me a paid vacation for two.

hope is not a plan. nor will it influence currency traders who understand that the united states will not raise interest rates until housing stabilizes, banks have recapitalized and their bad assets have been substantially written off. period.

2008 Jun 10 03:20 PM

[whidbey:]

It is a bluff. In an election year raise rates? Of course, what no one is saying is that the US policy makers are in chains. Increase rates and the economy tanks big time, long time. Leaves alone and jaw bone and get a few takers in the commodities and currencies. Lower rates to save the banks and housing markets the economy inflates then busts. What to do? Congress will break the tie with its fiscal policy and ....inflation wins. We know it, why pretend otherwise.

2008 Jun 10 04:08 PM

[whidbey:]

It is a bluff. In an election year raise rates? Of course, what no one is saying is that the US policy makers are in chains. Increase rates and the economy tanks big time, long time. Leaves alone and jaw bone and get a few takers in the commodities and currencies. Lower rates to save the banks and housing markets the economy inflates then busts. What to do? Congress will break the tie with its fiscal policy and ....inflation wins. We know it, why pretend otherwise.

2008 Jun 10 04:08 PM

[rank17:]

A piece I wrote yesterday....

US dollar's key role in oil drama
Oil up, US dollar down. Or is that oil down, US dollar up?
The past week has demonstrated just how important the dollar/oil polka has become.
Oil's recent stratospheric surge has become the market's dominant investment driver. It's becoming a threat to economic activity and has raised the very real spectre of 1970s-style stagflation.
The pain of a $US135-plus price has highlighted just how inelastic oil's demand profile can be - at least in the short term. But the increasingly vociferous howls of protest from consumers suggest that "demand destruction" is at last starting to bite.
It's been interesting watching the market response to the latest round of price rises. There is a view that what we are experiencing is somehow unique - or at least, not something we've seen since the oil shocks of the 1970s.
But how accurate is this? Let's take a quick recap.
Over the past three months, oil has jumped 58 per cent. In just over four years, it has risen 240 per cent. Pretty remarkable.
But, then take a look at the market in the four years prior. In October 2004, when oil hit a record high of $US55, it had just completed a three-month, 55 per cent rise. In the preceding three years it had risen 218 per cent. Sound familiar?
So this takes us back to December 2001. What of the prior period? In September 2000, oil had peaked at $US37. This happened to follow a five-month, 55 per cent price rise. And a 247 per cent rise from its 1998 low of $US10.72 a barrel.
So investors should be used to the quantum of these moves.
But the fact that they're not, and that this one is creating some very real pain, suggests we may at last be testing the market's choke point - the point at which price does indeed trigger a significant consumption response.
In 2004, when the market "adjusted" to then-record prices, we saw a 27 per cent correction back to $US40 - the launch point for the current price run.
In 2000, prices eased 30 per cent over the first few months following the September peak. By way of comparison, were we to now see prices fall back to around the $US100 level, this would equate to a 27.5 per cent correction.
How realistic an expectation is this? Three inputs would be needed to precipitate such a price response: increased supply, decreased demand and a strengthening US dollar.
Saudi Arabia has again led the way on a possible supply response. This week, Saudi Oil Minister Ali al-Naimi called for a meeting between consumers and producers over "how to deal with record prices".
Given Saudi Arabia has some 2 million barrels a day of spare production capacity, it has a key input into any price correction.
But also, expect pressure on the US government to consider "targeted" sales from its 727 million barrel US Strategic Petroleum Reserve. This has been utilised as a safety valve in the past - most recently after supply disruptions that followed Hurricane Katrina.
On the demand side, apart from declining US and European off-take, expect mounting pressure on China to begin a phased reduction in its fuel price subsidies. Without this, there will be no consumption response from the second-largest oil importer.
But the biggest impact on prices could come from a meaningful move on the US dollar.
After the setback of European Central Bank president Jean-Claude Trichet's rate rise comments, the focus has returned to what appears to be a concerted effort by US authorities to lift their ailing currency.
The week began with US Treasury Secretary Henry Paulson hinting that active currency intervention was being considered.
"I would never take intervention off the table, or any policy tool off the table," he said.
This followed comments last week by US Federal Reserve chairman Ben Bernanke that he was working with Treasury to "formulate policy" that would prevent the dollar from declining further.
From a Fed perspective, this implied that US rates were at best "on hold", the next move more likely to be up.
This view was reinforced on Monday after New York Federal Reserve president Tim Geithner indicated that "tighter monetary policy" may be needed globally.
On the issue of recent US dollar weakness, he pointedly added that "no government, nor central bank, can be indifferent to changes in the value of its currency".
Completing the pro-dollar jawboning, US President George Bush was interviewed ahead of the US-European Union summit in Slovenia. He indicated that he would be telling the summit of the need for a strong dollar.
"We want the US dollar to strengthen," he said, adding that "relative evaluations of economies will lead to that dollar strengthening".
He received unlikely support from OPEC president Chakib Khelil.
"The economic crisis in the US caused the US dollar to drop sharply and the threats against Iran heightened geopolitical tensions. If it wasn't for these factors, the price of oil would probably be $US70," he indicated.
All told, plenty of talk. The market will now be waiting to see how this converts into action.

2008 Jun 10 05:17 PM

[Melancholy ...:]

Come on, USD. You can do it. I think I can, I think I can.

Thanks, Bernanke and company. You're gonna save us from that smelly French man, after all!

2008 Jun 10 08:01 PM

[Just Say Whoa!:]

"It's a bluff. In an election year raise rates?"

Well, it is similar to a high stakes game of poker, but this is no "bluff".

The Fed is composed of smart people.

Smart people know who is going to be the next President of the United States.

And it ain't gonna be another "Fortunate Son".

Actually, the economy might improve a little in 2009.

Before it gets worse in 2010-2011.

Why would it get worse?

Mortgage Resets.

And the fact that for the first time in history--this is truly a Global bubble--larger than all previous bubbles combined.

And it may pop in 2011:
www.marketwatch.com/ne...

So, the Fed wants to raise rates soon, while they can, before the megabubble pops.

Grace, in the last couple of years, I've made a lot of money off of currency and betting the dollar would fall.

I sold almost all of my dollar shorts and now I'm long UUP.

The dollar be goin' up....at least for awhile.

2008 Jun 11 12:12 AM