Home Sales Give Support to the Dollar

Good day… The dollar rallied on Friday, as reports showed that February’s existing home sales were up 3.9% when compared to January’s figure – the most in three years. The move up by the dollar continued in European trading this morning on speculation that a U.S. government report will show a rebound in new home sales this morning. The markets expect new home sales to show a month on month increase of 5.7% compared to last months dramatic drop of 16.6%.

I expect the housing market to continue to dominate the market, as investors and traders argue over the next move by the Fed. Friday the dollar rallied as reports showed housing had rebounded and traders reduced bets that the Federal Reserve will cut interest rates. However, this latest dollar rally will likely be short lived. Recent events in Iran caused crude oil prices to surge, which should keep the FOMC from cutting rates anytime soon. Fed Governor Frederick Mishkin, the newest member of the central bank’s board, said over the weekend that inflation is poised to recede only “gradually” given the recent rise in energy prices.

We will wait to see if Chairman Bernanke repeats the dovish tone of Mishkin’s comments as he testifies before congress on Wednesday. Bernanke will probably assure us the problems with the subprime mortgage market will be contained and won’t spread to the other areas of the economy. You and I know this is nothing but a bunch of bunk!! As Chuck and I have explained, the recent problems that have come to light are just the tip of the iceberg. Be warned; the problems in the subprime market will send shockwaves through our economy which could have negative implications for years to come.

Bernanke’s testimony will be accompanied by the durable goods numbers which will also be released Wednesday, followed by fourth quarter GDP, personal consumption, and the weekly jobs numbers on Thursday. And we will close out the week with a flurry of data on Friday: Personal income and spending, the PCE deflator, Chicago purchasing manager, construction spending, and U. of Michigan confidence.

The euro may come under some selling pressure today as there is speculation a German report tomorrow will show that business confidence declined for a third month in March, suggesting rates are less likely to rise in coming months. The IFO Institute’s sentiment index is expected to decline to 106.5 from 107 a month earlier. Even at 106.5, the IFO number remains at a multi year high, so any sell off in the euro should be looked at as a buying opportunity. Offsetting the expected drop in German business confidence is a report published this morning that French business confidence rose to an 11 month high as unemployment declined.

Also, European consumer confidence for March will be published on Friday and will likely show a rise to the highest level in six years. This will increase pressure on the European Central Bank to keep raising rates in order to keep consumer inflation in check. Recent comments by ECB board members have made it clear that they remain hawkish and will not hesitate to raise rates in order to combat inflation. “When the economic situation is positive – and the past few months it’s been positive – you must look ahead,” ECB board member Bini Smaghi said today. “Oil price is a risk and you have a labor market getting tight. There are risks.”

ECB member Erkki Liikanen also sounded hawkish: “Monetary policy is on the accommodative side and interest rates are moderate. There are upside risks for inflation.” The region last year expanded at the fastest pace since 2000, giving labor unions more room to seek higher pay and companies to pass on higher costs. I look for aggressive rate increases from the ECB, which will push the euro toward 1.40 by year-end.

The pound traded near a three week high versus the euro amid evidence U.K. house-price growth is accelerating. Property values in the United Kingdom had their biggest gain in almost four years in March, a survey showed today. This follows a report last week that showed consumer prices in the United Kingdom unexpectedly quickened last month, holding above the bank’s 2% target. With strong output prices and house prices, there is a good chance the BOE will be looking to hike rates again which will keep the sterling supported.

Minutes from the BOJ’s February meeting show that the board raised rates based on the outlook for the economy and prices over one to two years, and not due to short-term data. “The bank had made the decision from a longer term perspective,” most members said, according to minutes of the February 20-21 meeting, taking into account the possibility that consumer prices may fall in the short term.

With land prices rising for the first time in 16 years, it now looks like the world’s second largest economy is beating deflation. These land price gains, coupled with recent improving economic data, will prompt the central bank to raise rates again earlier than many investors expect. As we have seen in the past, any unexpected increase in Japanese rates will start a reversal of the carry positions and dramatic moves up by the Japanese yen.

Finally, reports from China state that the People’s Bank of China will raise rates in order to rein in the supply of money to curb asset bubbles, inflation, and excessive investment in factories. Interest rates in the world’s fastest growing major economy continue to be accommodative, so an increase would seem to be in order. As Chuck has suggested several times, a move up in the value of the Chinese renminbi would also go a long way toward reining in the economy!

Currencies today: A$.8059, kiwi .7136, C$ .8610, euro 1.3271, sterling 1.9618, Swiss .8186, ISK 66.57, rand 7.2215, krone 6.1211, SEK 7.0082, forint 185.95, zloty 2.9159, koruna 21.05, yen 118.15, baht 33.10, sing 1.5186, HKD 7.8136, INR 43.38, China 7.7382, pesos 11.012, Silver $13.22, and Gold $659.40

That’s it for today… I had a great week in Colorado, but it is great to be back home. We had beautiful summer like weather here in St. Louis, with temperatures reaching over 80 degrees. No big upsets in the basketball pools, as two of four number one seeds made it into the final four. Hope everyone has a great start to your week!!

Chuck Butler — March 26, 2007