Coelacanth

The Great Dollar Pump of 2008: A Doomed Central Bank Intervention

9/7 Strategy:

EUR/USD: Buy dollars in to weakness.

GBP/USD: Sell Cable in to strength.

Mission Accomplished.

Axel Weber Rescues the Euro

I agree the euro may see some upward strength towards the 1.48 -1.49 handles just because the move down is looking a little extended.

That said, I think people are dreaming if they think the ECB is going to hike rates again. The EU has made no bones about their desire to see a weaker euro to help their exporters. That said, central bankers don't like to see their currencies fall in to death spirals (like USD earlier this year) and I suspect Papademos's jawboning the other day was more an attempt to make sure the depreciation of the euro is more orderly rather than sudden. It's also telling he got on the wires just after German CPI showed clear inflation easing in August.

Another ominous sign is the German unemployment read for August ballooned way above consensus (-10,000 consensus vs. -40,000.00 actual).

The divergence between ECB rhetoric and economic reality on the ground is widening.

Will the European Central Bank Cut Rates - It’s Anybody's Guess

The ECB's Papademos got on the wires this morning and said they may have to raise rates if growth picks up or to quell a "wage price spiral". He's a known hawk and it's hard for me to imagine many currency traders (myself included) out there still believe the ECB will raise rates.

At the same time Papademos sounded the cauldron on inflation again this morning....German August reads for CPI came in well below consensus....suggestin... lower oil prices are easing some inflationary pressures. My take is that as growth continues to falter in the euro-zone and inflationary pressure continue to show evidence of easing.....the cacaphony of calls to lower rates from EU business leaders, politicians and consumers will only get louder.

It won't surprise me at all to see the ECB do an about face in the 1st two qtrs. of 09' and start cutting rates.

Market Predictions: 'Crazy' About the Dollar

Hey Paul,

You bring up some great points.

I could be mistaken but I thought the increase in minimum wage was going to get phased in over time. Plausibly this could mitigate wage pressures in the near term keeping us out of a wage-price spiral situation.

I agree with you about the auction rate securities mess. Pretty daunting. I think most companies are working hard to re-imburse investors though and it appears the Fed is going to keep lending to commercial banks for some time to come.

My sense about the negative effect a strengthening USD would have on American exports is would have to appreciate much, much further for that effect to be truly palpable. The flip side is a stronger dollar will help to tamp down domestic inflation and gives Americans more purchasing power. We'll see.

Market Predictions: 'Crazy' About the Dollar

MarkMedayski,

So the truth is revealed.....you're a Jew hater and your opinions read like some hack partisan blogger.

Market Predictions: 'Crazy' About the Dollar

MarkMedayski,

Interesting take. So you basically want euro to go 1.70 thereby choking off and killing euro-zone exports even more so than is happening now? Great idea.

Interest rates to 10%? Too funny. While the ECB will be lowering rates in 09' - 10'.....ours will be rasing them.....making America's assets more attractive than the euro-zones.

Euro-zone unions aren't doing you any favors either. Because you're so unionized compared to us "stupid Americans" many euro-zone employees have already won outsized wage increases. Betcha can't guess how euro-zone companies are going to compensate for higher unit labor costs. Can you say wage-price spiral?

EU Industrial production, manufacturing, consumer sentiment, consumer spending, business confidence....all falling off in dramatic fashion.

The EU is about to find out if the twelve gold stars on their flag are in deed representative of unity and perfection.

Market Predictions: 'Crazy' About the Dollar

Excellent piece Louis....and yes I agree the euro has much longer slide to go. Siesmic shifts don't occur like this all the time and investors would do well to take advantage of what's happening now.

It was interesting this week to see euro-zone, French, Italian & German GDP growth for the 2nd qtr. were all negative. Despite Trichet's hawkish stance I suspect euro-zone slowing will become more and more pronounced in the coming weeks and months The cacophony of calls to lower rates will only get louder and louder.

The BOE's quarterly inflation report this week was striking in how dovish it seemingly was....almost hinting rate cuts may come even before CPI, PPI and import/export input indicators show signs of slowing. The idea being that as long as it was evident that inflation had peaked or was cresting....rate cuts would happen sooner rather than later.

My suspicion is the same may happen in euro-land and that markets haven't priced in this possibility.

Has the Dollar Bottomed?

German consumer confidence at a 5 year low, Euro-zone & German June PMI reads all below 50 (denoting a contraction of manufacuturing), German Business sentiment IFO reads dropping below the psychologically important 100 mark, Industrial output for the euro-zone falling 3 months straight, French consumer spending falling off, etc.......many economists out of the euro-zone are now saying the EU block probably contracted in the 2nd qtr. (As a reminder.....the U.S. hasn't experienced negative growth yet)

One could argue that between the euro & dollar it's a "battle of the ugly ducklings" at the moment but it seems clear to me, despite all our troubles that are pretty much all priced in to the buck by now, that the euro is wildly over-valued relative to the dollar and yen given their medium term fundamentals.

It won't be a straight line but don't be surprised to see the euro around the 1.45 - 1.50 handles in 6 months to a year.....if even that long.

A Surprise in Store for the Dollar?

What I love about days like today is how no one is paying attention to a rapidly deteriorating situation in the euro-zone.

As Ms. Lien correctly points out.....French, Italian (and Germany) all showed pronounced weakness in their industrial output for May and there is every indication that the euro-zone may have contracted in the 2nd qtr. (As a reminder...the U.S. hasn't experienced negative growth yet).

Too boot, Mr. Trichet has indicated that he is willing to tolerate a flaring up of inflation in the short-term to see it moderate in the medium term (early to mid-09). IMO as the fundamentals continue to deteriorate in the euro-zone, traders will begin to "price-out" further rate increases and the euro will fall in value.

IMO the greenback appreciating against the euro will be less a reflection of dollar strength as much as it will be a reflection of the euro losing value against other currencies.

It's a contrarian play and a bit dicey but I think a trader could make a very good case for shorting EUR/USD from the 1.59 - 1.60 handles.

Good work Ms. Lien.

As Dow Breaks Bear Stearns Low, Euro / Yen Hits High

The EUR/JPY looked ridiculous up there in light of struggling global equities. Seems like ultimately it might gun for 170.00. I might be looking to get short around 169.95 - 170.00 depending on what the ECB does and says next week. If the IFO reads of last week are any indication it looks like the euro-zone is finally cooling off.

Carry traders have had it good for a long time. Yen crosses are looking decidedly wobbly and a rude wake up call may be just around the corner.

Dollar Sentiment Largely Unaffected by Today's Data

You're right on the mark Gracie.

Gotta admit I was surprised by the flash GDP numbers out of Germany & France last night. I do think growth will slow eventually.
Germany is in better shape than France

The French have to reign in public spending. Their public spending deficit is on track to eat up an astonishing 64% of GDP in 2008. Highest in the euro-zone. No wonder the EU is badgering them to get their financial house in order before assuming the rotating EU presidency in July.