U.S. Dollar Shaking Off Risk Aversion

Even though the stock market dropped by the largest amount since 2000, the US dollar is shaking off risk aversion to rebound back towards its monthly highs against the Japanese Yen. I’ve been keeping a close eye on gold prices and the fall in gold this morning confirms that the markets have not been spooked by the drop in the Dow. The strong durable goods numbers dollar bulls hope. The stock market could actually recover today since the durables number indicates that not all businesses have cut back their spending.

The divergence between the price action of the dollar, the stock market, gold and oil prices indicate that risk aversion yesterday was limited. Even though the dollar dropped against the Japanese Yen, it rallied against all of the other G10 currencies. Within all of the volatility yesterday, the dollar index actually rallied.

If the greenback managed to shrug off the weak existing home sales data and jobless claims, then it is almost certainly going to gain strength on the better than expected durable goods, new home sales and consumer confidence data which suggests that the US economy may not be in as a bad as a shape as everyone may have feared.

Comments

[wyosteven]

*groooan* When durable goods optimism is centric upon military spending one has to cringe at the premise for your optimism. I might recommend considering to tread lightly with economic condition predictions based on sentiment in the short term.

[Coelacanth]

wyosteven,

On balance I would have to agree with Ms. Lien.

In addition to defense spending, non-defense capital goods, excluding aircraft rose 1.4% after a decline of 0.1% in May. Shipment of these items rose 0.7% after a 0.2% gain the month before.

Clearly the numbers reflect more than military spending and suggest U.S. factories are holding up due to increased exports overseas. If you want further proof than check out 2nd qtr. & 3rd qtr. results of companies like Caterpillar and Monsanto.

[DSB]

- The durables number was boosted quite a bit by defense spending

- New home sales were up, but so are foreclosrures (defaults) www.bloomberg.com/apps...

- The dollar strengthens as the velocity of money slows down (liquidity leaves the system)

- Inflation may drive the fed to raise rates, which will strengthen the dollar but kill banks.

- I believe the dollar was beaten down by the assumption that the Fed would continue to write blank checks. Once the FNM/FRE bailout happened, the fed's language implied that they would not bail out other institutions down the road. This gave dollar bulls clarity, considering that each bailout = weaker dollar in theory. Also, when the obligation of the Fed in regards to FNM/FRE was estimated to be 26B (and nowhere near 5T), the dollar continued to strengthen.

- Oil is a wild card. Iran tension will push oil up, wheras deflationary pressures (lack of demand) will send it down (strengthing $).

- Why isn't the market rallying more with such 'great' economic news today?

- Within the last 6 weeks, 4 major institutions have issued dire warnings for the US Banking system, and the government has taken extreme measures to prevent collapse. Is more to come? The dollar bottomed this year on the day BSC went belly up, which tells me that the Dollar is also correlated to the health of the derivatives market.

At the end of the day, there are several things that push the dollar around - including foreign monetary policy & macroeconomic events such as the amount of liquidity in the market, oil prices, and Gold. Not all of these are good things, so I wouldn't necessarily correlate dollar strength with overall economic strength.

[NutritionFacts]

All can see is a consolidation at the moment on the DX. We are waiting patiently to see if the euro will break above 1.57 on its way to 1.60; or not.

[CLH]

The rally was way too strong and rapid. Th huge sell off Thursday should have been expected. I expect the rally to continue for some time at a slower pace. The first spike was due to short covering. Shorts are now frightened and will be reluctant to be so bold.

I expect the dollar to continue to strengthen. Europe is weakening fast. They will learn as we have that inflation is not the problem but deflation instead.

[gigem77]

The dollar index was almost 82 this time last year. Today it could not rise above 73. It is churning below the 200 moving average. Before you call it "strong", look at a chart. But forget for a moment the DXY, which is primarily a comparison with the euro and yen. Consider gold, higher by 43 dollars in 30 days, even after the big sell off. And it's higher year over year by 254 dollars. The dollar is toast when compared to something physical.

[GMiki]

That's the thing--why compare the currencies? We want to retain puchasing power, for which the precious metals are incomparable.

[nevket240]

Everyone forgot the Feds interventionist attitude. Especially in concert with those who hold just the odd billion or two.
"Free markets". Only to the manipulators when it suits!!!

regards.

[The hand]

like a herd of cattle, it does not take much to spook the market. good news moves market up, bad news makes it fall. my belief friday was going to be a carnage on financials but the very positive durable goods report before the opening bell settled the market down for an overall small gain.

in any event, the forex was already set before the market opened and i see no relationship to market events on friday and the dollar.

[paultaut]

Just because Europe is weakening fast doesn't mean the Euro will. US supply in dollars is escalating not decreasing. Meanwhile more commodity users will use the stronger currencies as payment or a basket of same further weakening the Dollar.

Please consider, with Oil down about $24 or say 17%, why is the Dollar struggling at 73?

[CLH]

paul---Europe raised interest rates and still the dollar held. The dollar has turned up. The euro is over priced and headed down.

[CaptBob]

The Fed has only one bullet in it's gun and the caliber is--Printing press.

If anyone really believes all this bail out liquidity is being created to help homeowners, consumers or any other segment of the American Public have your living space swept for toxins.

This is Bankers helping Bankers and to think they would make a 180 degree turn to strengthen the dollar-which would HURT Bankers- --(higher rates)--Pinch yourself you must have dozed off.

The trillions are to much to repay and the debt decreases with a weak dollar. Measure the dollar by it's purchasing power of gold, oil or even coffee not by other currencies, they're fiat too and playing the same game so we don't beat them up too badly.

Also believing Govt. economic numbers of any kind places you in dire peril!!. Does anyone really believe inflation is 4%?? Think about it.

[User 30121]

To you posters, gigem77, GMiki, captbob, and paultaut: You are just pissing into the wind when you try to give (as you typically do) very sound rationale to the CLH's of the world...because they can't see the forrest with the damn trees in the way...! They just REFUSE to get it! PMs are the devil, you know, kinda like Bush....stupid is as stupid does, you know. We'll just count our blessings (and profits) in a little while when gold is punching through 2200. and the silver tsunami crests 57.00 in 2009, sooner if Israel kicks the shit out of Iran!

[Did U Think The Ponzi Scheme Would Last?]

"Shorts are now frightened and will be reluctant to be so bold."

I really think that is overstepping in a significant way. I am a net short and I am in no way frightened. Quite the contrary. IMO the bull is badly wounded, perhaps mortally. It seems he ran into a brick wall at 100 mph.

Now the bears are starting to circle. This is a VERY strong bull and the smart bears are not just going for the kill. They are letting the self inflicted wounds bleed the strength from the bull. One mighty thrust from those powerful horns could cause a bear some major damage, so patience is the order of the day. But fear? No way. This is simply the careful art of stalking wounded prey. As the prey weakens from continuous bleeding, the bear attacks will be more severe and the bull defense will be of smaller magnitude and shorter duration. At some point the bear is going to have this bull by the neck. This is the natural order of things. Don't blame the bears. The bull did this to himself. A new bull will be born in the future, but we are looking at a decade or more of bearish feasting on the last bull carcass.

You want to see fear? Look into the eyes of Helicopter Ben. He knows where this is going. He knows the fear.

[bgamall]

CLH with the National Bank of Australia writing down AAA rated CDO's to TEN CENTS ON THE DOLLAR, the dollar is toast long term. We could face a depression, although I hope we do not. Then you will have your strong dollar. Whoopie.

[gigem77]

The dollar can rise against all currencies including gold. It requires that the US government cut spending, reduce dependency on foreign oil, reduce or eliminate the trade deficit and if Americans at all levels clean up their balance sheets by reducing debt and living within their means. Is there any evidence of those things? But that's my falsifiability test.

One other possibility that would give the old buck a boost would be a deal with Iran. This isn't as far fetched as it sounds. IF both sides can claim victory, the spec shorts would take oil down another 10-20 dollars and we would get a 1000 + move on the dow. The final triumph of gold over fiat would be postponed again.

Now what are the odds ?

2 more banks failed and are being closed this weekend. Good luck dollar bulls.

[Calvin C.]

Invest in RMB?

[Did U Think The Ponzi Scheme Would Last?]

"Invest in RMB?"

RMB is strengthening relative to the dollar, but not relative to real money which is gold. Chinese inflation is on the rise.

Most currencies in the world have some formal relationship to the USD. As it dies so will they be hurt. No fiat currency is safe over the next decade IMO.