Housing Data to Continue Dollar's Slide

Good day… And welcome to another week. We’ve had some terrific weather here lately, which makes these summertime weekends just too darn short! This week will bring us more data on the status of the U.S. housing market, so don’t look for any turn around in the dollar’s recent slide. Today’s data cupboard is empty, and tomorrow will only bring us Richmond’s Fed index and the ABC consumer confidence number. Wednesday should be a good one for the currencies, as we will get the MBA mortgage applications, existing home sales, and the Fed’s beige book. Thursday will bring us the weekly jobs data along with durable goods orders and new home sales. The durable goods number is expected to be positive, but will be more than offset by the new home sales numbers.

Finally, we will end the week on Friday with the second quarter GDP reports, which are expected to show that U.S. economic growth accelerated last quarter, paced by a rebound in manufacturing and growing exports. GDP is expected to come in at 3.2%, which would be the highest in a year after the economy grew just 0.7% in the first quarter. I don’t expect the number to be as strong as expected, so don’t look for any big rally in the U.S. dollar to end the week.

The euro (EUR) hit a new high of $1.3845 in European trading before moving back down. The euro was supported after ECB executive board member Lorenzo Smaghi indicated he sees no reason for concern about the currency’s appreciation, saying it reflects the strength of the 13-nation region’s economy. By contrast, “The weakness of the dollar reflects the weakness of the U.S. economy,” Bini Smaghi said in an interview with the Italian news program TG1 today.

And the good news just keeps rolling in from ECB policy makers. ECB Vice President Lucas Papademos said he expects growth in the euro-area economy to remain “solid” in the coming quarters. “Currently, the euro-area economy enjoys a solid and broad-based recovery and growth is expected to remain robust in the coming quarters,” Papademos said today in a speech. “The credibility of the euro is reflected in its attractiveness, which extends beyond the boundaries of the European Union. The euro is being used by many economic agents outside the euro area – private individuals, corporations, financial market participants, investors. It has become the second most widely used international currency in the world.”

I am putting the finishing touches on my presentation for the San Francisco Money show. In it, we warn investors about the dangers of a U.S.-only portfolio. The presentation won’t really hold any new insights for readers of the Pfennig, but it did give me an opportunity to step back and see just how scary things are for the U.S. dollar.

Apparently Chuck has San Francisco on his mind also, as he sent me the following note last night:

“If you’re going to San Francisco… Be sure to wear some flowers in your hair…. If you’re going to San Francisco, you’re going to meet some gentle people there…

“That was a theme song from the Summer of Love.

“OK… Reading through the newspapers, and trader notes, I continue to see more and more a reality check, if you will, with the media on this housing debacle. One report after another tells of how people are coming to the realization that this is going to be a huge hickey for the economy – and thus, the dollar.

“Under the heading of ‘Dropping Another Shoe’…

“Did you see the story that talked about restitution in the amount of $325 million to homeowners in the Ameriquest Mortgage Settlement? This is unbelievable! First it was the builders, then the subprime lenders, now the hedge funds, with rumors of real money losses and now this – restitution to 25,000 homeowners who were likely subjected to Ameriquests’ fraudulent and illegal practices.

“It’s always someone else’s fault isn’t it? Blame it someone else… But don’t get me started on that subject! The story here is that this is just another in the food chain of events that are going to put big hickeys on the economy.

“And then this from Bloomberg… ‘”The outlook for the dollar is still bearish,” said Robert Robis, an international fixed-income portfolio manager in New York at OppenheimerFunds Inc., which oversees $250 billion. There are still significant concerns that the subprime debacle will lead to more serious problems in the financial markets.’

“And this… ‘”You are going to see more downside in the dollar,” said Rafael Martorell, chief dealer of spot foreign exchange at BNP Paribas Securities SA in New York. People are getting nervous about the credit market. The concern is this may weaken U.S. growth.’

“Yes… It’s too bad that it took all this time for these people that have far more gray matter than I to see that the subprime problems were going to cause havoc for the economy and the dollar!

“But then… I’m not tied to the media…

“OK… I haven’t really touched on the gold and silver since I started feeling better and contributing to the Pfennig… But, there’s really nothing new to talk about. Gold and silver have been tied to the dollar for so long, and with this renewed negativity opening up old festering wounds in the dollar, gold and silver have gotten back on the rally tracks!

“I’m of the belief that gold and silver have formed some very strong bases and are ready to move higher once again; and they won’t be held back by oil; they won’t be held back by the base metals…

“Speaking of base metals… Last week we told you that China’s economic growth hit 11.9%, (really slowing down, eh?) and that news lifted copper to a two month high. There’s renewed speculation that demand in China will climb; and where there’s speculation… There’s actual action!”

Metals aren’t the only commodities rising on increased demand. Oil continues to move up in price, and is now predicted by Goldman Sachs Group Inc. to hit $100-a-barrel in the next few months. The commodity “supercycle” is still going strong, and will continue to support the currencies of countries that are rich in them.

Two of our favorite commodity rich countries over the years have been Australia and New Zealand. The Australian dollar (AUD) advanced for a twelfth day – the longest winning streak since it was allowed to trade freely in 1983 – and the New Zealand dollar (NZD) traded above 0.80 cents. Surging metals prices have supported the Aussie dollar, as they are one of the top exporters of copper, iron ore, and gold. Seeing the stronger than expected GDP numbers out of China, Citigroup revised their forecast for the Australian dollar to 90 cents (not a real aggressive call seeing as the Aussie dollar is currently over 88 cents!)

The New Zealand currency rose above 80 cents for the first time since it started trading freely in 1985 on speculation that the central bank will raise its benchmark interest rate this week. The currency has gained 14% this year against the dollar, benefiting from some of the highest interest rates in the industrialized world. With interest rates predicted to continue to increase, and commodity prices remaining strong; it’s tough to make a case for the currency peaking in the near term. Stick with these commodity based currencies; they will continue to outperform in the short term.

Currencies today: A$ .8828, kiwi .8011, C$ .9569, euro 1.3811, sterling 2.0569, Swiss .8304, ISK 59.63, rand 6.8307, krone 5.7255, SEK 6.6491, forint 177.96, zloty 2.7280, koruna 20.4155, yen 121.31, sing 1.5083, HKD 7.8209, INR 40.2887, China 7.5628, pesos 10.7677, dollar index 80.28, Silver $13.32, and Gold… $683.00

That’s it for today…What a great weekend! We drove down to pick up our daughter Lauren from summer camp; it was her first time away from home and I’m happy to report she had a fantastic time. Did everyone get their copies of the latest Harry Potter book? We went and bought ours Sunday morning and my wife won the coin toss on who got to read it first. It’s been a frustrating morning on the desk as our computer systems are completely locked up. Hope everyone has a better start to your week than I’m having!

Chuck Butler — July 23, 2007