The U.S. Dollar Falls Even More

Good day…And a Fantastic Friday to you! It’s the end of another week that not only brought us the beginning of spring but also a major shift in the currency market. The effect from the Fed’s decisions on Wednesday carried over into yesterday’s trading session with the dollar engaged in another large sell off. How long and how far would be the big question marks right now but until another major event comes along, the dollar should continue to get sold.

As I just touched on, the dollar was still down and out suffering from a two day hangover yesterday as a result of the quantitative easing measures the Fed has decided to pursue. We also gained some insight into the TALF that I mentioned yesterday which is intended to resurrect both consumer and business lending. They will expand to accept securities backed by four types of loans that include leases of business equipment and rental car fleets, securities backed by loans extended by mortgage servicers to cover missed payments by homeowners, and securities for floorplan loans. The Fed also said that this announcement was a first step in expanding the TALF and that a number of other asset classes are under review.

The funding is partially coming from the Treasury’s $700 billion TARP (Troubled Asset Relief Program) and is designed to increase lending by extending 3 year loans at low rates to investors in order to buy loans packaged into AAA rated securities. This along with the policies introduced so far shows the willingness to pump as much cash as needed to jump start the economy and credit markets. At the same time, there is concern that once the economy recovers, the Fed won’t be able to unload the securities quick enough to raise interest rates and offset inflation. That fear of inflation is what has fueled the fire in the large dollar sell off.

Bill Gross was interviewed to get his take on what transpired and thoughts of future consequences. Here is a snippet of what he had to say, “Basically, if the Chinese or other foreign holders don’t want to buy Treasuries, that’s a lack of support for the currency. And I think that’s what you’re seeing in the last several days.” He went on to say that “inflation is another one too. A declining dollar would directly lead into that.” As yields get driven down on Treasuries by the Fed, investors are being squeezed out and prompting them to find returns elsewhere causing the dollar to fall.

The exodus out of dollars continued for a majority of the day with the euro peaking at 1.3738, which we haven’t seen since the beginning of January, and then some gradual profit taking brought it back down to 1.3650 by the time I was shutting down for the night. Still, the euro racked up an impressive gain and continued its winning streak by putting up another 1.5% against the dollar. Goldman Sachs adjusted their target for the euro up to 1.40 from 1.35 and I have seen other economists calling for even higher figures.

Along with the euro, the commodity currencies are expected to be the big movers against the dollar, especially if risk tolerances continue to tick upward. All of this money being pumped into the economy is causing investors to buy tangible assets to guard against the inflationary pressures. Oil traded above $52 a barrel for the first time in 3 months and, of course, pulled the Norwegian krone along with it. The other dynamic with oil is the fact that prices fluctuate with the prospects of economic growth, which have turned more positive lately. If the economic data continues to disappoint and snuffs out these positive feelings, that may weigh on oil.

Gold also had a good day at the office as we saw it climb to over $960. Gold has traditionally been viewed as an inflation hedge along with an alternative investment to the U.S. dollar, so we have these, what would be considered normal, fundamental reasons coming back into the picture. Over the past several months, the uncertainty in the markets have added yet another reason to buy gold, which would be as an uncertainty hedge.

The second best performing currency yesterday, the Japanese yen, was up as speculation the US and Europe are committed to keeping yields very low. Interest rate differential has played an important part in the direction of this currency but their fundamentals just aren’t there to support longer term appreciation. As I say that, we did see the yen shoot up to 93.54 yesterday and is giving an opportunity for many to sell at a profit. We still think, at this point, the big move in the yen has already passed us by and not really looking for much of an upside from here on out…but you never know the way the market has been moving lately.

As I came in this morning, there has been some profit taking pressures as European industrial production dropped by 17.3%, the most on record, in January. The euro is now trading around 1.3580 and gold has fallen by a few dollars. This report has shifted the focus on another rate cut by the ECB away from selling the dollar for the moment, but we’ll see if that has any legs as US traders will be in the drivers seat pretty soon. Another ECB member has re-iterated that “unlike other central banks, we have not completely exhausted our margin for maneuver on interest rates” and added that the current 1.5% isn’t the lowest that we will see. In other words, look for the ECB to drop rates by .5% at their next meeting.

As far as economic releases go, the cupboards are empty today as nothing is due out but we have a big one next week with the final revision to 4th quarter GDP. Yesterday turned out to be yet another day of bad news with the number of people collecting unemployment rising to a record 5.47 million, indicating that companies still aren’t hiring. The March employment report that is due to out in a couple of weeks looks like it will be very grim as the monthly figures have remained above 600k for the past couple of months.

Leading indicators, which is a gauge of the economy’s direction over the next 3 to 6 months, fell .4% in February from January’s revised down figure of positive .1%. Manufacturing in the Philadelphia region shrank in March for the 15th time in the last 16 months according to the Philly Fed, showing that manufacturers are still struggling not only domestically but also globally. Its going to be interesting to see the impact of these stimulus measures in the months to come and if additional resources will be added. Well, that takes care of it for me, so off to the Big Finish.

Currencies today 3/20/2009: A$ .6903, kiwi .5598, C$ .8083, euro 1.3648, sterling 1.4498, Swiss .8922, rand 9.6726, krone 6.3461, SEK 8.1064, forint 221.90, zloty 3.4053, koruna 9.7715, yen 94.81, sing 1.5093, HKD 7.7502, INR 50.65, China 6.8278, pesos 14.2471, BRL 2.2563, dollar index 83.115, Oil $51.10, Silver $13.57, and Gold… 958.97

That’s it for today… Again, thanks to Chuck for letting me be your tour guide this week… It was a lot of fun and was certainly action packed. I’m planning on having a relaxing weekend while watching a lot of basketball. We have our Missouri Tigers taking on Cornell in first round action this afternoon…can’t wait. Anyway, Chris comes back from vacation so he will take over on Monday morning until Chuck jumps back into the saddle. That’s it for me, so until next time… Over and out. Have a Fantastic Friday and a Wonderful Weekend!!