A Huge Dollar Rally

Good day… And a Terrific Tuesday to you! Well… I sure received a shock yesterday morning. After ranting about the euro (EUR), blah, blah, blah… I hit the send button, and then got ready for work… After arriving, and turning on my currency screens, I saw euros had fallen by two whole euros! That was in less than an hour!

OK… Now my tail was between my legs, and I whimpered off to a company meeting. After an hour and a half, I returned to my desk to see that the euro had bounced off its low, but still much lower on the day from where it stood overnight! So, what caused this huge sell off? Well… Margin calls on stock losses were a reason… And so was a technical correction.

The margin calls on stock losses can also be blamed on the sell off of gold. As the day went on, stocks recovered, which meant risk was creeping back into the markets, and led to carry trades being put back on. Japanese yen (JPY), lost the luster of the 113 handle it held yesterday morning.

So… Does this change everything I said yesterday about the G-7 giving the markets the green light to sell dollars? NO! And I still believe that the euro will be trading up to 1.50 within the next six months.

G-7 was so adamant about renminbi (CNY) weakness… I have to wonder if there are plans being hatched to organize some sort of retaliation against China for not allowing the renminbi to strengthen. In terms of retaliation, I don’t mean anything drastic… I mean trade-war wise, tariffs, etc. stuff like that…

And one more thing about G-7 and then I’m finished with them… And that is… Apparently the Eurozone ministers had a statement all typed and ready to add to the communiqué with supportive comments about the dollar… And guess who nixed the statement? U.S. Treasury Secretary Paulson. I’ll ask this once again… If the United States doesn’t want a strong dollar, then why are people buying the currency?

By the time I get to Phoenix, she’ll be rising. Yes… By the time you read the Pfennig on Tuesday, I’ll be on my way to New Orleans. I’ve talked at length before regarding the history of this investment conference; I hope it doesn’t disappoint… It has never done that before!

Since I’m under the gun this morning… I have a snippet from a great article by my fave economist, Stephen Roach. My friend John Mauldin, with whom I will be dining tonight, ran Stephen Roach’s full article yesterday, but I’m going to keep to a snippet because this is the part about the dollar. Here’s Stephen talking about one of the things I keep coming back to – the huge current account deficit that the United States runs…

“Economic theory is very clear on the implications of such huge imbalances: Foreign lenders need to be compensated for sending scarce capital to any country with a deficit. The bigger the deficit, the greater the required compensation. The currency of the deficit nation usually bears the brunt of that compensation. It then follows that as long as the United States fails to address its saving problem, its large balance of payments deficit will persist and the dollar will keep dropping.

“The only silver lining so far has been that these adjustments to the U.S. currency have been orderly – declines in the broad dollar index averaging a little less than 4% per year since early 2002. Now, however, the possibility of a disorderly correction is rising – with potentially grave consequences for the American and global economy.”

Stephen Roach had one more comment that I’ve seen in a couple of different reports that he’s done recently… “Relative to the rest of the world, the United States looks painfully subprime. So does its currency.”

We had another Fed Head out singing the praises of the U.S economy. This after their boss told everyone last week that the housing meltdown was going to slowdown the economy. Fed Head Evans was upbeat in his forecast for the U.S. economy in 2008. Of course, he doesn’t know anything more than the rest of us, which leads one to believe that he wasn’t looking at the facts… But, he came out and acted like he knew what he was talking about!

As I get ready to head to the Big Finish, the currencies have rebounded versus the dollar overnight. That was some sell off yesterday! Whew! But the currencies weathered the dollar’s storm… And what didn’t kill them, will make them stronger!

I told the EverBank ALCO group yesterday that the Fed had another rate cut arrow in their quiver that expires 12/31/07… They will use it before it expires!

There’s no U.S. data today to speak of… So… Here we go!

Currencies today: A$ .8930, kiwi .7525, C$ 1.0290, euro 1.4220, sterling 2.0425, Swiss .8530, ISK 60.60, rand 6.8240, krone 5.4250, SEK 6.4780, forint 177.21, zloty 2.5730, koruna 29.1220, yen 114.30, baht 31.50, sing 1.4650, HKD 7.75, INR 39.63, China 7.5025, pesos 10.80, BRL 1.8125, dollar index 77.78, Oil $85.90, Silver $13.61, and Gold… $761.70

That’s it for today… I was wrong yesterday when I mentioned that I hoped Chris Gaffney would be able to pick up the Pfennig this week. I had completely forgotten that Chris is on his way to Panama this morning for an International Living Conference. I had done Panama twice in the past year, and decided I had seen enough, and it was time for someone to go! Besides, it happened to fall on the same week as the New Orleans Conference… So… We divide and conquer! Glad to see things back to normal today. I’m on the road again!  Have a Terrific Tuesday, and I’ll write to you from the road the rest of the week!

Chuck Butler
October 23, 2007

The Daily Reckoning