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The US Dollar Swells Despite a Weak NFP Report

|Includes: ProShares Ultra Semiconductors ETF (USD)

By David Frank, Chief Market Analyst

Despite the losses through the second half of last week, the US Dollar Index saw its first weekly advance in over five weeks. It also was the Buck’s best performance (2.6 percent rally) since October 2008. The comparison in performance should represent an easy bridge to fundamentals. Three years ago, the market was dealing with the worst financial crisis and economic recession the world had seen since 1929.

Why is the Dollar rising? The first consideration is manipulation. The Japanese Finance Ministry’s effort to drive the value of its own currency down led to an incredible 3.2 percent rally for USDJPY. In plainer words, the dollar’s value increased.

Manipulation, the intervention or indirect through policy, is now common place. Efforts by Japan and Switzerland to push their respective currencies lower are common place. Direct intervention rarely meets lasting success. Why?  Because, this practice of manipulation, fights the elemental demands for safe harbor currencies. Even more problematic is consistent policy efforts. In the comparison between the US, Japanese and Swiss currencies, it should be noted that the Dollar is the weakest of the group of safe haven currencies. Why? The US Federal Reserve has instituted an unprecedented stimulus program.

The more active force behind the upswing in the US Dollar this week was the spread of financial trouble from Euro zone to the US itself. The fall of MF Global (once a FED Primary Dealer) was triggered by a large holding of bad European government debt. Should European banks who are parking more capital with the ECB and Fed while demanding more dollars to meet another crunch, this European problem can easily spill over to States. Should Italian government yields rise above 7 percent and then fall, we will see even more US banks with exposure issues. With all  this said, how long can the dollar continue to remain strong?

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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.