A Closer Look at the Dollar Rally 29 comments
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Bloomberg is reporting Euro Falls the Most in 8 Years on Reduced Bets for Higher Rate.
"This is the beginning of a new chapter for the dollar as Trichet and other central banks are paying more attention to the downside risk to growth," said Dustin Reid, a senior currency strategist at ABN Amro Bank NV in Chicago. "The decline of oil prices is a significant driver behind this dollar rally because it enables other central banks to turn their eyes away from inflation and focus on growth."
There were significant moves again on Friday. Let's compare a few charts and see what happened. (Click on charts to enlarge.)
$USD - US$ Index Daily (Thursday Evening)
$USD - US$ Index Daily (Friday Evening)
Thursday evening I said:
On the daily chart the US$ crossed resistance and sitting right on the 200 day exponential moving average. It has not closed above the 200 EMA since March of 2006.
The 200 EMA has been decisively taken out. This is a major breakout on the daily chart. The 200 EMA should serve as support going forward if this rally is for real.
$USD - US$ Index Monthly (Friday Evening)
The US$ is now sitting on the monthly downtrend line. This is major decision time. Dollar bears better be considering the possibly that the long slide from 2000 is over, at least for a cyclical bounce. A break above this trendline could lead to a rally to 85 or even 90. Note the year long dollar rally in 2005. We could be in for a repeat.
$XEU - US$ vs. Euro Weekly (Thursday Evening)
$XEU - US$ vs. Euro Weekly (Friday Evening)
Thursday evening I said:
On the weekly chart there is a clear double top. This is now a third test of the 152-153 area. I did not think the last test would hold but it did, moving on to a double top. With the Fed on hold and Trichet's likely next move a cut, there is plenty of room for the dollar to rally vs. the Euro.
That sure did not take long. Support is now at 147.5. If that does not hold, the weekly and monthly uptrend lines will be broken. Furthermore, given that the Euro is 57% of the US$ index, if the Euro breaks down, the US$ index weekly and monthly charts are going to break out.
$XBP - US$ vs. British Pound Weekly (Thursday Evening)
$XBP - US$ vs. British Pound Weekly (Friday Evening)
Thursday evening I said:
The British Pound broke the weekly uptrend line and has been floundering in a sideways channel for about 8 months. However, the bounces appear to be weakening and it's do or die for the pound right now. I doubt support holds this time.
$XBP - US$ vs. British Pound Monthly (Friday Evening)
The monthly uptrend line in the British Pound is now broken. One must give these things a little room, but it appears this is it.
Based on action in the US$ daily chart and across the board with the British Pound, this is either one hell of a headfake, or the weekly and monthly dollar charts will soon follow suit. Dollar bears and commodity bulls could be in for some considerable pain if that happens.
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This article has 29 comments:
It is, however, just a technical analysis, and while I do believe that tech does indicate something about peoples mood and even economic conditions, There IS always still reality out there.
I am not sure if the US economy is really out of the woods. The huge deficit is still hanging over us, and it remains to be seen if the financial crisis is really over - or is the other foot just about to fall? With predictions that the Republican Recession will be more protracted, I am not putting a lot of faith in a long term dollar rally.
I think it turns out that the Euro was just one bubble trade in a big package of dollar-traded commodity bubbles. Versus the dollar, I think it's now clear that major foreign currencies were acting like just another traded commodity.
Now that the big one - oil - or the big two, perhaps - oil and the euro - have broken, it's deflation time.
"Deflation" - you may want to look that word up, because it doesn't seem to be in the popular parlance these days.
My premise is that we do not watch dollar strength, as well as severe weakness in the other currencies. You might also see this as faster money printing by the ECB and other central banks compared to the FED.
The real thing is not what happened,but what will happen.
The USA economy is in the great depression with banks falling and companies going bankrupt,peple losing their houses and jobs.
The only thing Americans can do is to export their goods at the discount,same Japanese do with their Toyota and Sony etc.,and even this didn't helped to bring Nikkei225 back for almost 20 years it is 70% below it's high o 45,000 points.
We are in the bear market for USD,US stocks to last at least another 10 years.One day of USD jump made you crazy,it is a dead cat's bounce.Look for EUR to be at 1.60 very soon (till September) and 1.70 thereafter.Dow Jones at below 10,000 till September and in October below 9,000.Oil reached it's bottom for sure,maybe there is more technical selling to come by and we see it few bucks lower,but it will be braken immediately as fundamentals are here and everybody fights for energy future resources (Iraq war before,next move Iran-DISASTER),Natural Gas so cheap,is like buying new Diesel jeans for 1$ forever...
Forget about charts,look into your neighbours bank statement,who will must sell his mutual fund (bonds,stocks everything goes) shares to pay for gasoline.
Technicals are good for day trade and history we know anyway.
medayski@yahoo.com
A) Mr. Treasury Secretary Hank Paulson stated approx 4 weeks ago, that they (the treasury & the Fed) would use any means necessary to support the dollar.
B) Central banks around the world could now be intervening to support the dollar. (as stated by others in this string)
C) Both the Treasury and the Fed have spoken with the Senate Finance Committee about the issue of Americans moving assets outside of the U.S. territories (offshore). I.E. the issue of high net worth Americans (>$100M USD) selling their dollars for other currencies thus moving their assets to save financial havens/banks . Therefore, the Senate Finance Committee has started an effort to curb the run out of the U.S financial system and the dollars. (Watch Sen Baucus and Sen Grassle) Or, jus t start watching the news about reports of the U.S. gov going after any American with assets outside of the U.S. (offshore bank accounts in foreign currencies or offshore gold held by holding firms)
D) Here’s a rhetorical question, do you think that any U.S. financial company would go public and state that some of their largest account holders just withdrew 90% of their USD, thus had the money wired to offshore accounts around the world. (As in the Bear Stearns melt down, 98% of the herd won’t know until it’s all over)
E) Today, it could be argued that the latest current slowness of clearing wires (both domestic & international), may be contributed to massive flight of dollars out of the U.S. system. From real experience, I believe the clearing systems at times may be close to overwhelmed.
“Hank’s Hammers” to support the dollar and by my numbers he has used the first three hammers thus far:
First Hammer: CB’s intervene to support therefore dollar goes up. (Data is starting to support this activity now)
Second Hammer: Senate Fin Sen Baucus – Grassle goto work to slow down or stop the flight. (ongoing)
Third Hammer: Jawboning and time. (Ever noticed you will always see Hank speak before a crisis breaks out) (ongoing)
Fourth Hammer: Worse case: Have our close and dear friend raise U.S. interest rates. (we are not there yet)
NNHH: Next New Hank Hammer: TBD or could be limits on the size-number of withdraws from the U.S. financial system/banks.
its the weak economy with slow growth and falling asset values led to flee of dollar investment to other currencies.....you can add solid emerging economies and their stock markets.
and then people piled on to that with dollar short trades adding more to the downside of dollar.
usa stock market wan not making money so people piled on to energy and commodities.
but now emerging economies stock market is no more attractive...in fact its risky so money is coming back into usa....
energy and commodities bubble is deflating because global economy has started cooling down due to usa cooling down....
and then we have reached the point where FED has signalled that its done with rate cut and it may increase rate(they wont do it, no need to do it now) which means its almost the dollar bottom.
yes usa financial sector is still not done writing down....housing may not recover till early 2010...job market has just begun showing signs of weakening...all in all its definitely not a show of strength.
but one does not have to be strong....if one is the least weak in the whole group...then it becomes the leader.
so its a sign of the fact the usa is still the leading economy of the world....the most reliable for investment....hence people will still buy usa treasury even though its yield is negative if inflation is taken into account.
for a long term policies/conditions were USD un-friendly....but now they are neutral, and this may be that bounce.
its also possible that Europe, china, india etc do not want dollar to go down since its hurting their exports and hence they may have helped this rally.
but right now USA is not the favorite investment destination due to all the maladies, hence i dont think this rally of USD will last more than another 7-10%, its mostly a trading rally right now....with people reversing their bearish USD positions.
if USA economy recovers...we wont be talking about 1.6USD=1EURO, it will become the other way around.
the weakest link in the whole scheme of things....housing. and there is no short term solution to that since housing is still expensive compared to income.
and to add more fuel to the housing problem we have credit market problems....making it difficult to get mortgages without substantial down payment...
the above two have added enough negativity to the macro-economy that we may also end up going into a long recession if right now companies start cutting corners in anticipation of slow economy.....leading to lay offs....more foreclosures....more credit market turmoils....its like a vicious cycle.
but i am not giving up yet....the job market has held up so far......and the FED has so far supported the financial market.....only if they can make the 30 year mortgage rates go down to 5%.....start giving loan with only 5% down payment, we may start digging ourself out of this hole.
but its near impossible to make mortgage rates go down and issue loan with less down payment because of the inherent risk in this melting housing market......i guess we need some kind of federal housing assitance as a back stop so that we can stop sliding backwards...
i am sure house prices will fall enough in 8-14 months that they will become affordable....but we need the mortgage market to offer better deal to get it moving....ton of people like me waiting on the sideline to buy a house.
Sure, there are a few problems in Spain with the housing market, but those bonds are covered bonds which are regulated to have much higher loan to value ratios and which are based upon loans that have not been lent out to paupers. Sure, there are European banks that got into the subprime party and now have big hangovers, but those are knock-on effects from the much larger U.S. disaster.
The Eurozone consumes more than half of its own production. It has other markets for its goods besides the U.S.
So, why has the dollar skyrocketed in the last few weeks, and especially in the last few days. I surely don't know, but here is my theory. With the U.S. economy getting hit with one historic body blow after another (most recently the technical insolvency or near-insolvency of the two main remaining supports for the mortgage bubble), central banks concerned about the possibility of a total run on the dollar have decided to wring out as much of the speculative downside bets vs. the dollar as they can, forcing those shorting the dollar to cover their betts, thereby raising the dollar up on the very scaffold that was intended to hang it. I think that they've used targeted intervention to accomplish that end.
I suspect that this is their way of battening down the hatches for the remaining economic disasters yet to befall the U.S. They also hope to scare U.S. investors who have fled the dollar (who are not speculators) back into the dollar fold.
Nobody wants a disorderly dollar decline, and I think that it is concern about such a disorderly decline that has caused the central banks to intervene.
Naturally, when I see the dollar roaring upward the way it has, it makes me question my own theories, if not my sanity, but it makes no sense at all based upon fundamentals, so then, what is it, if not intervention? Somebody tell me; I would really like to know.
All democracies see an erosion in their manufacturing base as they mature but this isn't the main catalyst to a currency's rise or fall.
Yes...Spain, Ireland & England are all seeing an huge unwinding in their housing markets. 15% of Spain's GDP is it's housing sector. Ouch!
You're minimizing the euro-zone's weakness.....industria... production, manufacturing, consumer spending/sentiment & retail sales have all fallen off a cliff and point to pronounced future economic weakness. Many economists are now saying euro-zone growth probably contracted in the 2nd qtr. In addition, euro-zone businesses are increasingly defaulting on their commercial loans.
A massive slowing in consumer spending suggests the euro-zone isn't currently consuming "half of it's own production". Additionally exports to emerging markets are slowing and England, where roughly 15% of euro-zone exports have gone in the past, is pulling in the purse strings.
Well....you don't have to guess or invent conspiracy theories for why the $ has had such a spectacular run of late.....most folks in trading circles know why. After the ECB's rate decision last week (and in particular Trichet's accompanying statment and news conference) investors began paring back bets the ECB would hike rates again.....to boot, based on medium term fundamentals, the euro is ridiculously over-valued against the dollar.
It's not so much dollar strength you're seeing as much as the euro losing value relative to other currencies....understa... the difference? Yes, it is based on fundamentals....namely the deteriorating fundamentals out of the euro-zone. Most if not all the bad news has already been priced in to the dollar.....can't say the same for the euro.
1) One currency is always traded relative to another. So even if in absolute terms the eurozone fundamentals don't seem as bad as the US fundamentals (an arguable point), it's the direction of these fundamentals that matters. Eurozone has been turning a corner (for the worse). So while the US fundamentals are bad, they're likely not going to continue to deteriorate at such a rapid pace as was occurring when we saw the dollar decline. Eurozone fundamentals, on the other hand, will probably see an increase in the rate of deterioration.
2) You can say this analysis is just technical if you want, because the chart just shows one point in time, and therefore it's apparently lacking information. But, the run up to this breakout was very strong. Anyone who was involved with the USD the weeks leading up to it would (should) have noticed this.
3) You say it's purely technical, but what was the final catalyst? Trichet's speech. Not just the rate decisions (which were as expected), but the thoughts of the central bankers on their respective economies is what pushed USD over the tipping point into this breakout. I'm pretty sure Trichet didn't mention any price charts in his speech :)
Of course, if you want to continue to be USD bears, more power to you...I'll be taking the other side of that trade.
I doubt whether the dollar will take out 77 but a full retrace to 80 is possible.
What does this do to the S&P? Better yet, what does it do to short term inflation in EuroZone?
Think about it, no change in Financial woes in US, plus a strong dollar destroys last bastion of S&P strenght. Weak EuroZone earnings and weak Euro, stagflation in Europe?
IMHO, The dollars rise at this juncture is the worst thing that can happen to the US economy.
Eurozone:
tinyurl.com/6626nr
So, OK, yes, the balance of payments is slightly negative and getting slightly more negative.
As a percent of GDP for Eurozone it went from -0.246% to -0.723%, 2007-2008, slightly above noise level.
Now, here is the U.S.:
tinyurl.com/63fg8m
The balance of payments is hugely negative, but it is true it is getting less negative.
As a percent of GDP it went from -5.335 to -4.330, 2007-2008, which is a significant reduction.
As an aside, you might want to consider that the U.S. GDP is bloated with useless military spending,
which is not true of the Eurozone, and so if one were to consider the GDP without this useless
spending, the percentage of trade deficit would be even higher than it is (not sure how it would
affect the trend). Why mention this? Because the military budget is funded by deficit spending, and
so could be arbitrarily high, which makes the economy seem arbitrarily large, and so could substantially
dilute a truly enormous trade deficit in an artificially large GDP. I don't know about you, but
if one half of a nation's economic activity amounts to borrowing money and burning it in a hole on the
lawn of the White House (if only military spending were so harmless), I'd certainly think that the real
size of its real economy was not as large as GDP would indicate, and would evaluate the significance of
its deficit accordingly. For example, the ability of the U.S. to export its way out of a deficit might not be increased by the tonnage of explosives that it stockpiles and/or drops on the heads of other people.
Whatever you may think of that argument, it must be admitted that the U.S. deficit is even nominally speaking six times that of the Eurozone as a percentage of GDP.
Note that these figures are the annual amounts, not the cumulative amounts.
According to the April, 2008 IMF WEO report, the "sustainable" level of a trade deficit is somewhere between 2 and 3 percent of GDP. Eurozone is obviously way under that level. U.S., on the other hand, is way above it. So, by that logic, the dollar's exchange rate would have to fall (at least vs. its major trading partners) by quite a bit more than it has in the last year.
If you figure that in the past year (April 2007 to April 2008) the deficit declined as a percent of GDP by
about one percent, and during that same interval, the dollar declined by about 12.5 percent vs. the Euro,
and consider that the dollar has at least another 1.3 percent to go to reach the IMF's "sustainable" level, one might think that it still had some distance to fall. Of course, maybe most of the fall will be vs. the yuan and not vs. the Euro. But if the U.S. economy is tanking, and China can't sell to U.S. anymore, and allows its currency to appreciate vs. the dollar (as it has been), where is China going to put those dollars that it has accumulated and is no longer using to buy treasury bonds to prop up the dollar? They can't absorb their present productive capacity internally yet, so they will have to sell more to Eurozone, and will probably start to prop up the Euro and sell to European consumers, and invest in European bonds and so on. Some, of course, will go to buy whatever is available for purchase in the U.S. via China's Sovereign Wealth acquisitions. Eventually, dollars will have to end up on the forex being converted into other currencies of nations that have some moveable goods.
Beyond the annual balance of payments deficit, there is a cumulative deficit of perhaps $7 Trillion dollars out there already as claims against the U.S. Certainly, that must be considered a liability. I don't know what the cumulative Eurozone deficit is, but I have to think about zero or even positive given the tiny present annual increments and even smaller earlier annual increments.
I think that implicit in those who think this recent dollar appreciation is real is the idea that all of the bad stuff about the U.S. has already been priced into the dollar. I don't believe it. The U.S. is still depending upon the "kindness of strangers," but those strangers are getting less enthused as the U.S. becomes less of a consumer and more of a simple dead weight.
Oh, and I'm not sure where you get the idea that "It's not so much dollar strength you're seeing as much as the euro losing value relative to other currencies...." According to this article,
"Strong U.S. Dollar Lone Holdout Against Well-Bid Euro," the Euro is rising against most other currencies.
Haven't actually check the charts, though - am I wrong about that?
www.economicnews.ca/ce...
Running out of time, but that's what I've got right now.
Republican recession?
Haven't the Dems controlled Congress since January 2007?
Here is the chart (you have to change the FROM: date at the bottom to 6/1/2008 to get a good view, as the Ruble's
re-valuation otherwise messes it up):
tinyurl.com/6c3fzg
As can be seen, not only the Euro, but also the Swiss Franc (CHF), the Japanese Yen (JPY), the Canadian Dollar (CAD) and the British Pound (GBP) have all fallen off dramatically vs. the dollar since August 1st.
So, the claim that this is due to Euro weakness rather than to support for the dollar cannot be, well, supported.
Interestingly, the yuan (CNY) has remained pretty much level with USD.
Even more interesting, the Russian ruble (RUB) has shot dramatically *up* vs. USD.
So, I get the impression that there is a support operation going on for the dollar. China is already supporting it and probably did not want to do more at this point. Russia probably did not want to get on board because of its strong antipathy to the U.S., which has tried to build a first strike capability against it in Eastern Europe, and may have instigated the recent brush-up with Georgia. But the European and Swiss Central Banks, which has swap lines already set up with the Fed that perhaps were the instruments of this (hypothetical) support, seem to have done more than their share. Canada is more resource based, so given the central bank support from ECB and the Swiss, may have fallen just because of its commodity dependence - or maybe it actively helped, too. As for Japan, they've been supporting for a long time via the carry trade, but now carry is down somewhat due to the volatility in the forex, which makes those trades more risky (which by the way does not indicate much confidence that the recent USD moves will continue monotonically, or stabilize, either). But they do have problems of their own, in part from having supported the carry trade for so long. So, maybe the Japanese decline vs. USD is just a knock-on effect of ECB and Swiss pro-USD intervention, combined with JPY weakness.
Well, that is very "speculative" (no play upon words intended or taken), but what seems certain is that we are seeing the dollar moving up rather than the Euro moving down due to Eurozone weakness. If the Euro and CHF are moving down somewhat more than the Yen or the yuan, it is probably because those are the banks most actively intervening on behalf of USD.
The main thrust of the post, regarding currency intervention supporting the U.S. dollar, is not affected by this correction. --LT
goldmoney.com/en/comme...
"When central banks intervene in the currency markets, they exchange their currency for dollars. Central banks then use the dollars they acquire to buy US government debt instruments so that they can earn interest on their money. The debt instruments central banks acquire are held in custody for them at the Federal Reserve, which reports this amount weekly.
"On July 16, 2008 (the closest date of the weekly reports to the July 15th low in the Dollar Index), the Federal Reserve reported holding $2,349 billion of US government paper in custody for central banks. In its report released today, this amount had grown over the past three weeks to $2,401 billion, a 38.4% annual rate of growth. To put this phenomenally high growth rate into perspective, for the twelve months ending this past July 16th, assets in the Federal Reserve's custody account grew by 17.3%, which is less than one-half the growth rate experienced over the past three weeks."
That is $650 billion in just three weeks. To give an idea of how much money this is, I think it is about 4.4 percent of the GDP for the entire Eurozone. One would have to think that intervention at those levels is not sustainable. Rather, it is probably an attempt to batten down the hatches by wringing out speculative bets vs. the dollar in preparation for the inevitable continued eruption of very, very bad economic news from the U.S. The goal would probably be to prevent a disorderly decline of the U.S. currency.