A Slow, Steady Drip

Good day. No, I’m not talking about myself! Hahaha! The slow, steady drip that I’m talking about is the euro’s rise versus the dollar, so far, in 2006. It’s been so slow that before you know it, the euro has gained almost 5% versus the dollar, this year! Last year, the poor, beleaguered euro had to combat a seemingly endless summer of Fed increases, a ‘No’ vote on the European Union’s constitution by France, and all that negative talk about how the European Union was going to fall apart.

But guess what? Ahhh, grasshopper, that’s right, the euro has put 100 miles of desert between what happened last summer and what’s going on today. Much like Superman standing on a rock high above all the commotion below, the euro stands strong once again! Germany’s economy has turned an about face and is leading the Eurozone out of the darkness that fell over them in 2005.

There seems to be no stopping the German economy right now, as business confidence soared to a 15-year high last month! With all the signs pointing to stronger Eurozone economic growth and accelerating inflation, the ECB will have no other choice but to raise rates, and close the gap to the dollar’s positive interest rate differential.

I’m sure that the euro’s potential gain is going to remain slow and steady. That is, until we know for sure that the Fed Reserve has put the dust covers back on the rate-hike machine!

So, we’ve got the Asian currencies playing ball with the European currencies now, eh? That does not spell good times or even “Dyn-o-mite” for the dollar, but don’t despair, dollar bulls. This is just what the doctor ordered: a case of dollar depreciation, especially versus the Asian currencies to correct the global imbalances. You won’t get hurt, dollar bulls, as long as you scrap that “dollar bull” mantra, and come on over to the (Oh, I wanted to say “dark side” there, but thought some would take it as something evil) diversification crowd!

If you don’t want to believe me, how about listening to Bill Gross? Yes, Bill Gross, of PIMCO. Bill Gross is “the man” when if comes to bonds and a host of other things. People are always picking his brain when it comes to investments, the economy, monetary policy – you name it. He’s “the man.”

Well, recently Gross wrote a piece on diversification and the end of the “carry trade” with regard to the U.S. dollar and the Japanese yen. Here’s his take:

“As global real interest rates converge, the export potential of comparative economies should begin to dominate exchange values and it is there, of course, where the U.S. is so critically deficient. Japan as we all know is an export powerhouse. Less well known is the ongoing ability of Germany as the center of Euroland to command global market share. The ascendancy of China’s production for export is of course unquestionable. That leaves the U.S. with its increasingly hollowed out manufacturing core as the near certain loser in currency valuations going forward. To be blunt, the dollar must go down as it loses its carry.”

Man! That guy is good!

Well, the Bank of Canada didn’t disappoint us, yesterday. They not only raised their official interest rate 25 BPS, they also made a pretty hawkish statement afterward (thus removing the thought that the Bank of Canada themselves had instilled in the markets) that they were nearing the end of their rate hike cycle.

The Bank of Canada (BOC) stated that their economy has been performing in line with their expectations for 2006, but then they raised their forecast for GDP growth to 3% in 2007 – from the previous 2.9%. The BOC indicated that their economy is “operating at or just above its production capacity.” They went further to state, “some further modest increase in the policy interest rate may be required to keep inflation on target over the medium term.”

The combination of the rate hike and the hawkish statement leaves the door open for further rate hikes, which should underpin the loonie going forward.

Did you see yesterday’s printing of consumer confidence? Instead of backing off like the “experts” believed it would, confidence hit a four-year high! What’s going on here? Hold on a minute, I’m going to go scream at the wall. OK, I’m back now. I got that off my chest! Oh, boy! Consumer confidence is soaring. Isn’t that just peachy? I don’t understand that, and never will!

Anyway, the consumer confidence result allowed the dollar to rally briefly, but by the afternoon, the euro was back above 1.24, and stayed there all night! Yes, through the Asian and European sessions.

Today, we’ll see March’s durable goods orders. In February, durable goods orders rose 2.7%. March’s result is forecasted to be on the downside of that February figure. Oh, and yesterday, March’s existing home sales didn’t fall as forecasted. They rose to 6.92 million. I just have to wonder if those home sales were done at lower prices to get them sold. I’m sure some mortgage person will update me on that!

Reuters was reporting yesterday that the U.S. silver ETC from Barclays was likely to be approved within “days.” This rumor put some wind in silver’s sails, and pushed silver close to the $13 handle, once again.

Norway’s Norges Bank is meeting, as I type my big fat fingers to the bone. I don’t expect them to move rates higher at this time, but have you seen the nice performance Norway’s krone has put on their time card so far this year? You haven’t? Well, let me take care of that right here, and now! The krone has gained almost 7% versus the dollar in 2006.

This is the reason I don’t see the Norges Bank raising rates. They don’t want to attract additional foreign investment that would push the currency too high. It really can’t get to out of whack with the euro.

If you do a roll call of the European currencies for 2006, you would see that the krone, as stated above, is up almost 7%. The Swedish krona is up almost 6%. The Danish krone is up almost 5%, along with the euro. So, on that uplifting note, I’ll head to the big finish!

Currencies today: A$ .7460, kiwi .6275, C$ .8830, euro 1.2415, sterling 1.7840, Swiss .7875, ISK 74.90, krone 6.30, rand 6.1730, forint 214, zloty 3.1375, koruna 22.90, yen 115.15, baht 37.70, sing 1.5910, INR 45.12, China 8.0163, pesos 11.18, dollar index 87.49, silver $12.81, and gold $633.35.

That’s it for today and this week. Tomorrow, I head out to Mexico. Chris will have the con on the Pfennig until I get back in the saddle on Tuesday. Things are really “hopping” on the trade desk, so I’ve got to get to work! Have a great Wired Wednesday!

Chuck Butler
April 26, 2006

The Daily Reckoning