US Dollar Rallies as FOMC Sounds the "All Clear Horn"

Well… The rally for the euro (EUR) didn’t have strong legs yesterday. Seems that a strong Factory Orders number here in the US got everyone thinking once again that the all-clear horn has been sounded for the US… The dollar rallied, commodities sold off, and gold lost $34 (as I left for the day). I’ll just say this about the all-clear horn being sounded… If things were so rosy, would the Fed/Cartel/Bernank, be leaving interest rates near zero? Why would the same crew be carrying out their implementation of quantitative easing?

And… If you read the Top Ten Currency Stories of 2010, last Friday, you’ll recall that about this time last year, some people (who should know better) were talking about a “recovery”… And the Fed/Cartel/Bernank was talking about removing emergency measures… And by the end of summer, they were talking about additional QE!

So… I just don’t see this “all clear horn” sounding, do you? In fact, I truly believe that this thought about the economy being in the clear will pass, and eventually we’ll see the Fed/Cartel/Bernank entertaining thoughts about QE3! Hey! I don’t want to be Donny Downer, all the time! But someone has to point out the problems so that we can steer clear of them. Otherwise, we would just nilly willy follow the boys on the cable news down the road to… Well, I had better stop there or else my blood pressure will be going through the roof!

So… At one point yesterday, euros were trading over 1.34, and by the end of the day, the single unit was hanging by a thread to 1.33, and overnight it has fallen further into the 1.32 handle. As I look at the currency screens, I don’t see any currency worth talking about… Shoot Rudy, even the Chinese renminbi (CNY), which normally is always positive versus the dollar, is weaker versus the dollar this morning!

The FOMC meeting minutes yesterday also gave those waving the “all clear flag” reason to believe that they are on to something, as the Fed Heads saw recent improvements in the “pace” of economic activity… OK… What the “all clear flag” wavers should have stopped waving to hear was: the committee members recognized that the level of economic activity was still too low, and progress toward the dual objectives of full employment and price stability was “disappointingly slow.” And, oh by the way… They are going to keep policy unchanged (interest rates near zero, and implementation of QE)…

Just shows to go you that people, investors, and others will take from a report what they want to hear… I heard about the recent improvements… But, Shoot Rudy, how could there not be improvements given the government’s interference in the economy?

The euro has seen further selling overnight despite news of an upward revision to the December Eurozone Services PMI (54.2 from 53.7). Portugal auctioned €500 million of 6-month bills and the auction was reasonably well subscribed (2.6x covered) with an average yield falling… And Germany auctioned €3.9 billion of 10-year bunds (their T- Bonds) and the auction was acceptably covered at 1.6x. These are all good results for the Eurozone, with no love toward the euro… You know when you’re in a mini-trend, for all data/fundamentals are ignored.

Just remember what I told you on Monday about the euro… Already forgot? Well, then, let me repeat it for you… I truly believe that this euro buying could be reversed as we go through the first month of 2011. The reason I say that is I truly believe that the euro will come under pressure, as the Eurozone gets probed to come up with better solutions to their periphery countries’ problems… I expect Germany to balk at many things, and when they balk, the runners get to move up… The runners being the dollar, and gold…

Eventually Germany will come up with a solution that’s agreeable by all parties (except Italy, they always whine), and that’s when we’ll see the euro come back. At least that’s my thought for the first part of 2011.

Now… All that could change in a NY minute if the markets don’t want to probe the Eurozone for better solutions, and instead take their fight to the US dollar… Which, in my opinion is the way it should be, with the Eurozone’s debt problems taking third, behind Japan and the US.

Oil dropped over $2 yesterday… Now, what in the world, could have caused that to happen? Did we discover an oil field that sits on top of the ground, and doesn’t have to be drilled for? Not that I want to see $100 oil, or $5 gas, like I’ve heard could be coming this year… It’s just that when I see an asset moving in a direction that makes sense, I have to question when the asset reverses that direction with no recognizable reason… Can you say Plunge Protection Team? (PPT) I knew you could!

On a side bar… Remember a couple of years ago, when I went on CNBC to talk to them about things that were happening in the markets in the after-hours that didn’t make sense, and looked like an “outside force” was moving them? And they laughed at me, and told me to take my theory to Hollywood, and see if they would make a movie of it! And then a month or so later, a guy came out and proved my theory? Well… I have to believe that the rise of gold and silver, and the rise of Treasury yields, and Oil, all being reversed on a dime, smells like PPT… It walks like PPT… And it talks like PPT.

OK… I got that off my chest! My endless campaign to address what I call the “Inconvenient Debt” will continue as long as this government continues to rack up the deficit… For those of you who missed it yesterday… The US deficit passed the $14 trillion mark… That’s $14 TRILLION dollars, folks! Can you believe that? In just three short years, we’ve gone from $9 trillion to $14 trillion! At this pace, we’ll be looking at $20 trillion before we know it! Aye, Aye, Aye… Doesn’t that just give you the willies?

So… What’s next for the “inconvenient debt”? Well… It’s the debt ceiling. Yes, very soon, the new congress is going to have to deal with a debt ceiling. If they don’t stop this spiral now, when will it get stopped? The retiring baby boomers are really beginning to mount, and the numbers just continue to get larger each year, and the strains on the entitlement programs will mount, and so will the deficit.

So… No matter what the mini-trends do… You know… And being a Pfennig reader you are miles ahead of those who aren’t Pfennig readers, you know that the Treasury issuance required to fund this ever-increasing deficit is going to be tremendous. And if you don’t think the US will be subjected to the problems that Greece and Ireland had when they attempted to issue bonds to finance their deficit, then I can’t help you… But, if you do agree, then you also know that to offset this lack of interest in our Treasuries, will be the government s 2-pronged fork, with both tines sticking into us, with astronomical taxation, and a much weaker dollar. Both are taxes to us, folks… For a weaker dollar is a reduction of purchasing power, which, is a tax!

I need to go yell at the walls for a minute, I’ll be right back… The reason I keep my iPod playing music in the morning while I write is to keep me on an even keel… You see, right there, I was about to start throwing things, when a great song came on, and I started singing along, putting the deficits, and all that bad stuff, on the back burner for a couple of minutes!

OK… Well, the Aussie dollar (AUD) has given up parity to the dollar once again… We saw this early last week, only to see parity gained once again in late week trading. And gold… WOW! That was some sell off of the shiny metal yesterday… And it doesn’t look like gold has any legs to mount a reversal today… But… That should be a light bulb going on over your head, folks. The light bulb represents the idea that gold is much cheaper today than last week, so if you liked the price last week, you’ll love the price this week! And what do I always say about gold and silver? Buy on the dips… I would think a $35 drop would represent a dip, eh?

I saw a story on the Bloomie this morning that caught my eye… It was about the Indian rupee (INR), which is a currency that I tend to forget to talk about, until I see a story on it, and then I say, “Chuck, you like the Indian rupee, why do you forget to talk about it?” Anyway… The story talked about how India has Asia’s fastest rising inflation, and an economy that is growing at a 9.7% clip. So, with the fastest rising inflation, The Reserve Bank of India (RBI) will have to continue to add to their six interest rate hikes last year, in 2011… And then a guy named Nick Bennenbroek, the head fx strategy guy at Wells Fargo, who was the best forecaster for rupees in 2010, said that “the rupee is one of our top three preferred currencies for 2011 in Asia. India remains an economic outperformer in 2011 and as inflation is high, policy tightening will continue.”

So… There you go! Some info on a currency I only talk about every now and then… And speaking of currencies that I forget to talk about… I always receive a handful of emails from readers who ask me why I don’t talk about the Swiss franc (CHF) more? Hmmm… Good question… I guess I tend to stick to the larger currencies, and ones that have stories about them to talk about. The Swiss franc pretty much flies under the radar most days… Yes, it was a star performer in 2010…

The floods in Australia are pretty significant, folks… A reader from “down under” tells me that the actual size of the land under water is greater than Germany and France combined and that’s just Queensland, there are floods elsewhere! Having lived in a flood area almost half of my life now, I’ve seen floods. The good thing about them, that is if there is a good thing, is that they don’t last, and eventually go back down… And when they do, there will be tons of tearing down and rebuilding in the country, which would be a good thing for the Aussie economy… I know it sounds insensitive and I’m not trying to be… Just pointing out that the floods won’t completely bad for the Aussie dollar, going forward…

Then there was this… In a follow up to my thoughts about China taking baby steps to eventually take the reins from the US dollar for reserve currency of the world, here’s the snippet of a story that appeared on Reuters

The World Bank issued its first yuan-denominated bond, raising $76 million and trying to promote the use of the Chinese currency in international markets at a time when China’s stake in the institution is about to increase. The World Bank’s 500 million yuan bond issue arrived when China’s shareholding in the World Bank is about to increase, potentially making China the third-largest stakeholder in the lender after the United States and Japan.

Chuck again… I’ve never been more convinced about China’s intentions than I am now…

To recap… The dollar rally that began yesterday, continued throughout the day, with the euro losing the ground it had gained and gold losing over $30! It seems that people/investors believe that the “all clear horn” has sounded for the US economy… I’m from Missouri, you’ll have to show me that before I believe it! The Aussie dollar has lost parity to the dollar, and with oil losing $2 yesterday, the loonie has also lost parity to the dollar. And a currency strategist believes that the Indian rupee is a good destination for an Asian currency.

Chuck Butler
for The Daily Reckoning