A Policy Change?

Good day… I trust everyone had a marvelous Memorial Day weekend! Plenty of rest and relaxation for me once the yard work was finished! The weather really heated up, and that was very nice! The currencies traded in thin markets yesterday, even though we were at home grilling… But from the looks of things, the London traders (this morning, and Asian traders overnight) decided to do some grilling of their own… Their choice of meat? The dollar!

First of all… Yesterday, the euro got things going in the right direction, after Germany’s Business Confidence for May rose to the highest level in over 4 years! Germany, which I always feel compelled to tell you is the European Union’s largest economy, is really pulling itself up by the bootstraps and getting things turned around in the right direction. Businesses are spending more to meet rising orders. Unemployment is falling, and Consumers are beginning to pull those euros out from underneath the mattresses and spend them!

So… The euro kick started the currencies… As we went along yesterday and into the overnight market, things got worse for the dollar, as it was reported that President Bush will name Donald Evans as the new Treasury Secretary… Yes, it was reported last week that current Treasury Sec. John Snow, was going to step down… But I didn’t think it would be this soon!

Anyway… Donald Evans is rumored to be Snow’s replacement… Now… We need to take a walk down history lane when other President’s changed the Treasury Sec. in the middle of the stream in order to change their dollar policy… President Reagan did it in 1985, which prompted the Plaza Accord, and sent the dollar down for the next ten years… And then President Clinton did it in 1995, with his hiring of Robert Rubin, who reversed the weak dollar policy…

Could this be what Bush is looking for now? A change to the “so-Called strong dollar policy”? Only time will tell… But I can tell you this right here, right now, traders have long memories, and have begun to trade the dollar as if this scenario that I just laid out was in fact, in place!

This is Big Stuff, folks… Worth following, for sure! It could mean that the Protectionism (Schumer & Graham and their tariffs on Chinese exports) that Snow fought off, will now be allowed, which would bring about a weaker dollar… It could mean a lot of things… So, stay tuned, same bat time, same bat channel!

Two weeks ago, I told you that the Risk Aversion going on in the markets was really taking aim at the emerging markets like, South Africa, Mexico, Brazil, Iceland, and so on… Well, the proof in the pudding came in the latest report by Emerging Portfolio Fund Research (EPFR)… The EPFR confirmed that Emerging markets equity and bond funds posted their largest cash outflows in the past two years in the week ending May 24.

The good news is that these Risk Aversion moves normally don’t go on forever… And this one could be seeing its peak. We’ll have to see, eh?

Speaking of Mexico… The peso has seen not only the Risk Aversion hurt its value VS the dollar… It has also seen the Presidential polls show a dead heat between the top two candidates! And… As I’ve always told you… Markets / traders do not like the “unknown”… And with the outcome of the vote now in question… We have “unknown” entering peso trading…

Good news from Sweden this morning, as the Swedish Current Account Surplus surged to its highest level… Ever! When I say “surged” I mean it too! Sweden’s 1st QTR Surplus hit 58.3 Billion krona, VS a 4th QTR reading of 38.4 Billion krona! Once again, I will say that the countries with Current Account Surpluses will most likely be the big winners VS the dollar as we go through this year and next year. I’ve said this for some time now… And with countries with Current Account Surpluses posting gains VS the dollar so far this year, that plan has played out nicely…

The ECB is back to talking about higher interest rates… This morning, ECB member, Liebscher said interest rates in the Eurozone are still “very low”… I agree! Now… We have to wait to see which June meeting the ECB will use to raise rates! My guess… Is June 8th! Mark your calendars!

There was good news from Japan overnight too! Japan’s Industrial Production hit a record high in April, while unemployment remained at a 7-year low! This is another set of reports that confirms the Japanese economic recovery is robust! Bank of Japan Gov. Fukui immediately came out and said he needed more reports like this one before he considers raising interest rates… I think he simply didn’t want to the traders get carried away with pushing yen higher VS the dollar… Interest rates in Japan will rise, in my opinion, by the end of summer…

There’s not a lot market moving data in this shortened week, but we will see the color of the FOMC meeting minutes, along with ISM Manufacturing, and we end the week with a Jobs Jamboree…

James Turk of Goldmoney.com was talking about Gold in Barrons, and here’s a snippet of his interview… “There are problems with the dollar, and that’s being reflected in a higher gold price,” Turk said. “I still fear we are going to see a panic in the dollar at some point.” He went on to talk about the price of Gold, and said… ” A near-term spike to $2,000 is possible, The price of gold will never again go below $500 an ounce.”

Currencies today: A$.7635, kiwi .6410, C$ .9090, euro 1.2877, sterling 1.8785, Swiss .8255, ISK 72, rand 6.56, krone 6.0850, forint 203.38, zloty 3.06, koruna 21.92, yen 111.90, baht 38.10, sing 1.5750, INR 45.26, pesos 11.23, dollar index 84.33, Silver $12.95, and Gold… $653.50

That’s it for today… A very busy day is in store for Jen and I on the trading desk, so I had better put this to bed and hit the “send” button! I hope you all had an opportunity to check out that website I gave you on Friday (http://www.boyofsteel.com)… My little buddy has 3 baseball games this week, so that should keep me busy… Have a great Tuesday and week!

Chuck Butler
May 30, 2006

The Daily Reckoning