A Bias to Buy the Dollar

Well… Russia has thrown a cat amongst the pigeons this morning with a rate CUT… Let me tell you why this is a big deal…

Well, everyone is thinking that the go-go countries of Norway, Australia, and Brazil will probably begin their rate hike cycles this year… While the US drags its feet and wallows in the zero rate mud…

The thinking was that the rate differentials to the dollar would begin to widen, causing even more pain for the dollar. And the reason these countries were able to raise rates was that the global economy was recovering, and there is no need to keep those ultra-low accommodating rates that just open the Pandora’s Box of inflation problems.

But then along came Russia, and their rate cut overnight. While this is just Russia, and not even a part of the currencies most people think to buy, it just reminded everyone that maybe the global economies aren’t as strong as one would like to think… And, when investors have those thoughts in their minds, the “flight to safety” bull-dookie takes place again, which means… Investors buy dollars!

I really don’t believe this will last too long, as I said yesterday, we’ll have a ton o’ data to deal with this week, and soon everyone’s attention will be drawn to the data… And, if the data is somewhat positive, and the dollar remains in the trading pattern that punishes the dollar when data is positive, then a turn around could be in the cards…

Yesterday, I read a story in The Wall Street Journal regarding the World Bank President (Robert Zoellick) and his thoughts on the dollar… I thought it would be appropriate to include them in this award winning newsletter! Snicker!

“The United States would be mistaken to take for granted the dollar’s place as the world’s predominant reserve currency, looking forward, there will increasingly be other options to the dollar.” And then… While the European Union faces similar challenges, Zoellick said he views the euro as a “respectable alternative if the dollar is weak.”

Hmmm… I would guess that he would only talk about this stuff, if the dollar was weak! Right? Why would he talk about this stuff if the dollar was the king of the hill like back in 1999 during the Tech Bubble? The dollar index was around 120 then… It’s 77, and been as low as 76 in recent trading sessions…

Speaking of respectable alternatives for the dollar… The Chinese renminbi continues its baby steps toward full liquidity, and widespread use. Recall I told you a few weeks ago, how China issued a sovereign bond in Hong Kong denominated in renminbi. The issue was 6 Billion renminbi in size, and was the first such issue ever done by the Chinese.

These baby steps, like the currency swap agreements with other countries to take dollars out of the trade between the two countries, and this bond issuance, is just what the Chinese need to do to get their currency to go “international”… And most important, “Convertible”… It will take years, folks… But eventually, you’ll see this happening more and more…

I suggest to you a simple things… To keep a journal… Folks, we are living in historic times… The US probably having to default on debt at sometime in the future, the dollar devaluation, the dollar being replaced as the reserve currency of the world, our move to socialism, and collectivism… It’s all there… You’ll want your grandkids to know what was happening, because, I’m sure it won’t be taught to them in the schools as it should! OK, I’m heading in a bad direction here, and need to get back on track…

OK after a week or so of telling everyone that would listen, that he was in favor of a strong yen, Japanese Finance Minister, Fujii, not only backed up the truck Sunday night to say that everyone had mistaken what he was saying, (yeah right, like we all are morons, and didn’t understand what he was saying, HAHAHAHAHAHA!) but last night Mr. Fujii, said that the government might intervene to weaken the yen!

See why I don’t like manipulated currencies? Governments are fickle, and whatever their whim or whatever blows their skirt up, just takes a currency in a different direction in a heart beat!

You know what? This just hit me like a ton of bricks (OUCH!) We had European Central Bank (ECB) President Trichet, was talking late yesterday afternoon about the dollar… And then Japan’s Fujii, was talking about weakening the yen… You don’t think… Yes, I do think that dollar weakness in on the minds of Central Bankers… The moves in the dollar in the past week were quite violent downward, and while everyone and their brother believe this will happen eventually, they certainly don’t want dollar devaluation to gain traction right now, when the world has tried desperately to get out from under the financial meltdown of last year.

I’ve talked about this before folks… One of the reasons you don’t hear ECB members, especially Trichet talk about the euro much is because they can’t be seen by the markets as promoting euro strength, for that would mean that they (the ECB) has given up on the dollar! And that would cause huge chunks of dollar value to be lost in a NY minute.

So… Here we are Sept. 29th, and it looks like “the boys” are propping up the dollar… Now, it will be interesting to see if the currency traders of the world, realize this, or if it just flies over their heads until they read the Pfennig! For, if they do, and they have the intestinal fortitude of their fathers and grandfathers, they would be testing the Central Bankers’ mettle… When a man’s an empty kettle, he should be on his mettle, and yet I’m torn apart… Just because I’m presuming that I could be kind of human, if I only had a heart!

OK… I guess I was being serious there for a minute, before going into my beautiful granddaughter, Delaney Grace’s favorite movie!

I guess that means I need to get this tied up and sent to the data cupboard!

The data cupboard will yield the S&P/CaseShiller Home Price Index this morning for July… The data is expected to show that home prices fell less than the previous month, with a -14% fall expected. We’ll also see Consumer Confidence for this month, which is expected to show an increase on Confidence (index number) to 57 from 54.1 in August. On a much lesser scale for data, the ABC Consumer Confidence is expected to weaken! However, the markets really only pay attention the Conference Board’s Consumer Confidence.

On Friday of this week, we’ll see the Jobs Jamboree for September… Right now, it is expected, (by the BLS of course who we hold in contempt for misleading Americans), that the unemployment rate will tick up to 9.8%… However, when you actually count the 59% of Americans that are out of work, the number goes to 16%… And then there are the chronically unemployed and the underemployed who can only find part-time work.

I told you last week that the unfortunate thing is the fact that the unemployed are remaining unemployed longer and longer… Right now, about 33% have now been out of work for more than 27 weeks.

And… Big Ben and the President really think that the economy is going good, when you have that kind of rot on the employment vine?

My good friend, David Galland, who by the way, has agreed to be a guest contributor to our monthly letter to clients of EverBank World Markets, called the Review and Focus, had this to say about the prospects of a strong recovery and continued stock markets prowess with the unemployment situation as is…

“In the final analysis, however, there is a real economy that underpins the stock market. At this point, the Wonderland rally is focusing entirely on the bright prospects for that economy. “Just imagine,” we are told, “how well these companies are going to do once the economy recovers.”

The problem is, the economy has no real chance of actually recovering until some major change occurs in the current policies of the administration. A changes that actively encourages new business formation, as opposed to what we are getting now, which is the exact opposite.”

Then there was this… Gold has remained under $1,000 for a few days now… Holding the door open for you? Wink, wink…

OK… To recap, The dollar is stronger this morning, as Russia throws a cat among the pigeons with a rate cut. A return of the “flight to safety” trades is in the cards today, but the data might bring the dollar back down to earth. It looks to me as though central bankers in Japan and the Eurozone, are feeling a bit uneasy with the dollar weakness.

The Daily Reckoning