Dollar Rally Could be Short Lived

It is now confirmed that the US housing and labor market is in serious trouble. New home sales broke below the 500k make or break mark for the first time in 17 years. The last time we saw new home sales at these levels was during Bush Senior’s Administration. Jobless claims also climbed to 493k, the highest since 2001. To add salt to the wound, durable goods orders dropped 4.5 percent last month.

However these depression like numbers failed to put a dent into the US dollar as investors hold their breath for the approval of Paulson’s Troubled Asset Relief Program. With Congress going on recess at the end of next week, something needs to happen over the next few days. The euphoria in the markets could be short lived since the stock and currency markets have been very fickle.

Gold prices are higher and everyone is hungry for US Treasuries, driving the TED spread and the LIBOR/OIS spread near historic highs. This tells us one thing - which is that lending between banks have frozen and big investors are still risk averse. Therefore I would not trust the USD/JPY and carry trade rally.

Paulson’s Plan Could be a Lose-Lose for the US Dollar

Paulson’s plan is ultimately a lose-lose situation for the US dollar. If it is approved, it would cause a destruction of the US balance sheet by increasing the nation’s debt ceiling by 6.6 percent to $11.315 trillion. If it is not approved or if Paulson and Bernanke only get a trimmed down version of the plan, they would have to go back to the drawing board to come up with other solutions to unclog the mess. If we end up being between rescue plans, the uncertainty would weigh on the US dollar. Therefore I still believe that the US dollar could fall another 5 percent over the next few months.

Comments

[Hal.P.:]

I totally agree that the bailout is a lose-lose situation for the dollar. I had to smile when I saw one comment compare the Paulson bailout to a Nigerian eMail scam. Kind of sums up my feelings on the whole deal.

2008 Sep 25 11:16 AM

[Chris B:]

Seems like half the dollar buyers are enthusiastic that this bailout will finally kill the credit crisis and the other half are running for the hills to escape the inevitable currency dilution.

It could be a fiscal win-win IF the prices of these MBS's and their collateral real estate stabilize someday. They would have to fall far enought to offer a reasonable yield to investors despite the foreclosures. If the govt. can buy these securities below that point and resell them for a profit... we might just be able to finance an extra month of the Iraq war at the expense of the banks!

2008 Sep 25 01:11 PM

[Ellen:]

I was listening to several of the Bloomberg on the Economy with Tom Keane podcasts today (they're excellent) and more than on economist said that the debt has been passed from private to public hands, but it will not be inflationary longterm because it's a shift, more than an increase.
The $64,000 question these days seems to be whether deflation or stagflation relative to the dollar and gold. The economists and smartest minds seem to disagree. Who is right!?!

2008 Sep 25 08:14 PM

[CaptBob:]

Chri & Ellen: Don't you realize this "Plan" is only the Inauguration outline for the Crowning of the new money Emperor!!!--More to follow.

The real Plan contains the words and music for "The Fat Lady" to sing!

2008 Sep 26 01:40 PM

[waynei:]

The destruction of billions of paper money, albeit the demise of financial institutions, reduced the amount of paper wealth of the dollar. Reduction in wealth is deflationary. If people do the logical thing and restrict purchases more deflation pressure is exerted. True, if the marxist guy gives everbody 1k each year, plus more $$ for volunteer work, such as driving teens to the local abortion mill (ie.. highschool) or going to nursing homes to entice folks into euthanasia, than wealth (false) is created causing inflation. Or if Iran should see no-spine in command, as did Irak/Syria and then conquer oil rich states, you will see inflation as energy commodities soar. Place your bets.
waynei

2008 Sep 28 02:56 PM

[Ellen:]

Chris,
I was hoping for more from you....
I was reading a Morgan Stanley report last night and they say they underestimated a number of global factors and are not even more bullish on the dollar.
As Fiat currencies go, maybe the stronger US Dollar is the correct play.
Longer term, I'd think more about adding to gold (physical not certificated) positions.
I was listening to Mort Zuckerman's Council on Foreign Relations panel with Nouriel Roubini et al. and even though deflation is the force right now, if this crisis is handled by monetization, as it looks as if it is right now at least, the inflation down the road is going to be awful.
Roubini thinks this won't happen and I put a lot of store in what he says, but I don't see how it's avoidable.
Ellen

2008 Nov 10 03:13 PM