Comments by Plosser and Paulson Send Dollar Higher

US officials are out in force Tuesday morning talking up the dollar and attempting to restore some stability in the financial markets. With US Treasury Secretary Paulson saying that “a strong dollar is really very important” and Fed President Plosser calling for a rate hike before the economy turns around, it is not surprising to see the Euro below 1.59.

A strong dollar is important because it helps to reduce inflationary pressures. If oil falls back down to $100 a barrel, half of the Fed’s problems would be solved. Consumers would become more liberal with their spending while businesses would become more optimistic.

For companies like American Express (AXP), more liberal consumer spending is exactly what they need. According to last night’s earnings report, the bank’s most affluent cardholders spent less on discretionary purchases in the second quarter. It seems that even their Black Card holders are cutting back, illustrating how widespread the pain in consumer sector has been.

Earnings from the banking sector continue to be weak with Wachvoia (WB) reporting a record loss of $8.9 billion. In response, they have slashed their dividend and plan on laying off more than 5000 employees.

However will the Federal Reserve actually raise interest rates “sooner rather than later?” Probably not. The focus is on restoring financial market stability and helping the banking sector find their footing. A rate hike at this time or this year for the matter would be counterproductive.

Comments

[cyclingscholar:]

Nonsense. A rate increase and firm commitment to fight inflation should be announced and enacted NOW. Bush should meet with his advisors/Fedspeak people and (1) announce a 1/4 hike in the discount rate; (2) announce oil released from the SPR as needed to curb price spikes, and (3) demand drilling in ANWR and hold congress IN SESSION until the law passes. Oil prices would collapse to $80 a barrel overnight, Obama would be history, and we'd never look back. The cost would be short term severe recession (6 to 12 months), much as Reagan short term medicine caused...but worth it in the long run.

cyclingscholar

2008 Jul 22 10:35 AM

[Coelacanth:]

I think oil at around $127.00 is helping support the dollar as well today. Didn't hurt that Ericsson & Vodafone had big misses last night too.

In a larger sense....sentiment is changing. Lipsky from the IMF said today "the euro is over-valued relative to medium term fundamentals".

Last night's awful Italian consumer sentiment number is just the start. Look for French consumer sentiment & Italian retail sales to be way off tonight. Given how the strong euro is killing exports in the EU block, a weak Industrial New Orders & German/Euro-Zone PMI advance figures for July aren't out of the quesiton. I expect the German IFO read to come in below consensus as well.

Most if not all the bad news has been priced in to the dollar. The same can't be said for the euro but IMO that's about to change.

2008 Jul 22 11:09 AM

[sappy:]

Talking about supporting the dollar and not doing anything is perhaps worse than not saying anything at all.

2008 Jul 22 02:50 PM

[Jason Rines...:]

Oh Ms. Lein, read my comments from three months ago. Why do you persist over and over again arguing Fed shouldn't raise rates or won't? CyclingScholar, you nailed what we should do.

2008 Jul 22 04:10 PM