Thursday, May 08, 2008

A Temporary Bottom For USD

Although I am a firm believer in USD needing to fall some more, indications are that the USD will recover and stand firm for the next couple of months at least. The USD sentiment boost came from weak Eurozone data and comments by Kansas City Fed President Thomas Hoenig. Hoenig, a non-voting member of the FOMC, said that “serious” inflation problems may lead the Fed to raise interest rates. There is a significant risk that higher inflation will become embedded in the economy and require significant monetary policy tightening to reduce it.

There is also a medium to long-term danger of letting rates go lower in an environment of rising food and energy prices. In fact, the short FOMC statement gave hints that the Fed may pause rate cuts for now, something which is a big support for the US dollar.

Eurozone retail sales data released this week showed a drop of 1.6% in March compared to a year ago, the biggest fall since the data collection started in 1995. Sales fell 0.4% from the previous month. Another government report showed that German manufacturing orders fell 5% in the year ended in March, compared with an 8.9% rise the prior month. Is the slowdown due to the strong Euro or the credit implosion, I think it has more to do with the former. This will certainly cap the Euro's strength temporarily. I am sure the ECB would like to see the Euro stop climbing for a while at least.

A short term rebound in USD will usually be seen as a good thing for US equities, but it will be more of a bear trap than a sustained rally. However, the USD alone would not be sufficient to mask the whole gamut of issues crowding the US markets. Housing, Fannie and Freddie, these are just two major potential blow outs. As for Asian currencies (ADXY), even a temporary respite will still keep most Asian currencies above the long term uptrend line. A short term stronger USD will take the steam off commodities price rally. Eventually, we all will come to the conclusion that demand for commodity is not from US or Europe but rather from growth in BRIC and the smaller emerging markets. Hence when that conclusion is arrived at, business as usual, Asian currencies to continue its rise. The USD strength will be very temporary. I'd be more worried about the Euro as its strength is not warranted and the effects are working its way through the economic and financial system.


lsblmllms said...

u look at the history of USD, when the news was bad it firmed.

etienne said...

err, which history is that, ah? In 2000, the dollar was 103 on the USD index. It hit a low of 71 just recently and rallied to 73 or therebouts. In 5 years, it's lost 30% of it's value and a bit more if your factor inflation in, which, by the way is also due to the dollar debasement. It has never recovered! Fundamentally, the dollar shows no sign of strengthening. This rally is happening because it's been kicked so badly that people are feeling sorry for it. Raising rates now to strengthen their currency is hogwash and spin. It's not going to happen anytime soon. Raising rates will see their banks go up in smoke one by one. As the Fed is a collection of private banks. They are not going institute policies to snuff themselves out.
A storm is coming. Protect yourself.

see said...

Conventional theory is rate cuts have caused USD to fall and weaker USD caused commodities especially USD denominated ones to rise
Someone mentioned an another theory that it's rising commodity prices which caused USD to fall but I forget what the reasoning was. What is your opinion? USD cause higher commodities or vice versa?

Also do you think speculators cause soft commodities prices like rice to be higher than it should be if just based on demand & supply