Dollar Bulls: Increased Economic Tolerance

For the US dollar, it is going to be a slow start to the new week with no major data due for release until Thursday. Consumer confidence and house prices will be out Tuesday and given the upside surprises last week, the data could be dollar positive. However investors will continue to be cautiously bullish dollars since it is hard to believe that confidence and house prices could improve in the current economic environment.

Last week, micro and not macro drivers impacted the US dollar. Bank earnings, movements in stocks and the fluctuations in oil prices (which can fit into macro) kept the dollar near the top of its monthly range. This week, it will be a tug of war between micro and macro drivers with earnings season in full swing. It makes you wonder how tolerable investors have become to bad news when the Dow and gold prices have not reacted to the reports that two more banks have been shut down by the FDIC over the weekend (First Nation Bank and First Heritage Bank). Although these are relatively small banks, in any other market environment, bank failures would weigh heavily on the dollar and the financial markets in general.

With that in mind, GDP and non-farm payrolls are due at the end of the week. Strong retail sales in the second quarter will keep GDP in positive territory and at least for another quarter, a recession has been avoided. There is no question that non-farm payrolls will be weak, but given the market’s increased tolerance of pain, the seventh consecutive month of negative job growth may only have a limited impact on the dollar.

The recent drop in oil prices takes a big weight off of the financial markets. Even average consumers are becoming giddy about the prospect of lower gasoline prices in the coming weeks. The word on the street is that gas prices could fall back to $3.50 a gallon (from the current national average of $3.95 a gallon) over the next few months. I am hopeful as well, but with the Hurricane season just beginning, investors need to be cautious optimistic about the drop in oil.

Comments

[Coelacanth:]

Given how chic it is to be "doom & gloom" at the moment it's pretty daring to be dollar bullish but I happen to agree that USD is bottoming and will see better days ahead.

The interesting thing about job losses is we just haven't seen the massive lay-offs you would expect to see by now. Even when you remove the BLS's funking "birth/death" ratio calculation, we haven't even come close to the number of jobs lost in the 01' - 02' recession.

At the moment I feel like it's a battle of the ugly ducklings between euro & usd but given how fast things are falling off in the EU block I won't be surprised to see euro around the 1.45 - 1.50 handles in 6 months to a year.

Just me but I'm going to use any remaining euro strength i.e. hotter than expected inflation numbers, horrible NFP report this Friday, etc. to get short euros. The "soft landing" they're expecting over there is looking more and more like it's going to be a "hard" one.

2008 Jul 28 01:15 PM

[Jason Rines...:]

-600,000 jobs lost this year isn't massive layoffs? I thought a moderately growing economy would add 20,000 jobs a month or in 8 months of 2008, 160,000??? I am not doom and gloom, I know exactly what is going on. This needs to change in Washington and I have some very interesting plans myself and a few others in Washington are executing. And they are all legal :)

2008 Jul 28 02:54 PM

[Coelacanth:]

Hmmm.....not sure where you're getting your information from but according to the BLS (primary source) we've lost around 420k non-farm payroll jobs this year......not the 600k you claim.

Between 2001 & 2002 we lost around 1.9 million non-farm pay roll jobs. (BLS)

So I stick to my original contention that we haven't even come close to the job losses that occured earlier this decade.

2008 Jul 28 05:31 PM

[NOWHEREMAN:]

Talk about the past will not change the current trend. Job cuts through the entire economy are rising not just the maligned housing arena.

Do you actually think that faced with escalating inflation, I am talking about the pass throughs from past, the rest of the world wants a stronger dollar?

That idiot in France thinks the Euro is overvalued by 30%. A drop that size would mean an equal increase in inflation because product prices would not be reduced to reflect the drop.

MER's CDO Mark to Market is being priced at 22 Cents on the Dollar. What happens when the rest stop denying the actual value of Level 3 assets?

Think the dollar will rise?

2008 Jul 29 09:22 AM