US Dollar Remains Strong in Spite of Negative Data

Negative economic data keeps streaming nonstop from the US, but amazingly, it has failed to derail the strong US dollar from its ongoing uptrend. On Sunday it was news of a government bailout of Fannie (FNM): (0.7457 +0.0057 +0.77%) and Freddie (FRE): (0.60 -0.06 -9.09%); on Wednesday investment bank Lehman Brothers (LEH): (4.37 -2.88 -39.72%) announced a huge unexpected loss after its shares dived on Tuesday; and today, both the US trade balance and initial jobless claims data came in worse than expected.

The US trade deficit rose 5.7% to $62.2 billion, the largest shortfall in 16 months, up from $58.8 billion in June, and much of the spending was on crude oil, which rose to a record back in July, thus raising the size of the outflow. Since oil prices have retreated by a big margin, we could see a narrowing of the trade gap over the next few months. US jobless claims fell to 445,000 from the previous week’s upward revised 451,000. Many had expected claims to fall to 440,000 from the 444,000 originally reported for the previous week.

Seemingly oblivious to these news, the US dollar remains resilient and continues to hold onto its gains against other major currencies such as the Euro, Swiss franc, Australian dollar, New Zealand dollar and the Canadian dollar. Wednesday a report from the European Commission predicted that the UK, Germany and Spain will slide into recession this year on slow consumer spending and declining exports, forecasting that these European countries would experience economic contraction for six months in a row. In fact, the Eurozone economy contracted by 0.2% in the second quarter.

What could potentially hurt the greenback would be an expectation of a rate cut by the Fed.

A rumor has been making its round Thursday of an emergency rate cut from the Fed. There is also another rumor saying that the Treasury Department is asking a US investment bank to bail out Lehman. Lehman shares continue to fall Thursday in stock trading, dropping as much as 46% on reports that JPMorgan (JPM): (39.20 -0.20 -0.51%), Citigroup (C): (17.79 -0.89 -4.76%), Sanford Bernstein, and others have sharply slashed their fourth-quarter forecasts for Lehman. There is little doubt Lehman is on the verge of a collapse, and perhaps so are those investors who are long on Lehman.

Comments

[CLH:]

The dollar looks good and I doubt the Fed will lower rates to destroy it.

2008 Sep 11 02:07 PM

[whidbey:]

The is not monetary virtue, but comparative lack of virtue in our trading partners. How long will it last? I suppose only until it is discovered that the dollar is hollow, or until the Fed cuts rates later this year, or when both come to pass. No big deal so enjoy it while it lasts.

2008 Sep 11 02:23 PM

[bbzz24:]

gold,oil,dollar. what do they have in common this year?
pump and dump

2008 Sep 11 02:33 PM

[Reinko:]

The US$ is indeed surprisingly strong while all fundamentals point against the US$. There is lots of evidence that the present momentum is a fake one so after the US$ tops out we will have two scenario's:

1) A swift bounce back to 1.60 on the Euro/US$ pair, or
2) A slow one just like in 2005 and so.

I estimate it will be scenario 1 but you never know it on the currency markets; if the Chigaco cowboys do not like scenario 1 in that case stuff could be different.

2008 Sep 11 02:35 PM

[Alex Filonov:]

Is it hard to understand that dollar really can go up in bad economy? That bad economic news are spelled d-e-f-l-a-t-i-o-n now, which is a growth of real purchasing strength of the dollar? If anybody thinks that inflation is the scariest thing in economy, wait until deflation strikes full force... Inflation/deflation is a function of money supply, GDP and money velocity, and in recession velocity is going down (and money supply is stable this year).

2008 Sep 11 05:01 PM

[NOWHEREMAN:]

If Velocity is the key, then the almost $19 Billion per day sloshing through the discount window should give you a pause for thought.

The fact that a Heads Up has been telegraphed to the rest of the world, makes me think LEH is destined for Bankruptcy. Meanwhile, if the 25 foot storm surge predicted for Galveston comes to pass, Bar the Door, Insurers will get hit hard and may be at the Feds door next.

2008 Sep 12 02:54 PM