Dollar Bulls: Increased Economic Tolerance

Includes: UDN, UUP
by: Kathy Lien

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.