An Asian Ambush on the Dollar

Good day… And a Wonderful Wednesday to you! I’m going with the no news is good news regarding my scan yesterday. I’ve not heard a peep from the doctors, but fully expect to hear something this morning. Thank you to all who sent along words of encouragement to me… And, here I was poking fun at the youngsters yesterday, regarding an “A” ticket, when I knew oh so well it was an “E” ticket… Writing at five in the morning can play tricks with your mind!

Well… The dollar didn’t slide any further yesterday… It didn’t gain anything either! The dollar spent the day looking up at the euro (EUR) showing off its new record level of 1.4560! It almost seems like we’re looking at a scene of: Another day, another new record low for the dollar… Momma said there’d be days like this, there’d be days like this my momma said… But what else can we expect from the dollar? I’ve painted the pictures so many times, explaining why the dollar should be weak, so I won’t get the paintbrushes out again today… But I have them… And I’m not afraid to use them!

And it looks as though the Asian traders have gotten the paintbrushes out… The dollar has fallen, no collapsed in Asian trading. The euro is trading at 1.4670! That’s right! A 1.46 handle – a full unit overnight! I was shocked when I turned on the screens this morning! Oh My!

How about the commodity currencies? WOW! What a super ball bounce! Initially, the Asians bought the commodity currencies of Aussie (AUD), New Zealand (NZD), Canada (CAD), South Africa (ZAR), Norway (NOK), the U.K. (GBP). But then it spread like wildfire after comments by Cheng Siwei, vice chairman of China’s National People’s Congress. Cheng was originally quoted as saying China should diversify its reserves by buying more “strong currencies” such as euros.  Although Cheng, who has a history of making slightly maverick comments, later retracted the remark on euros, the dollar managed only a marginal rebound and sentiment clearly remains very sour.

Very sour indeed! This is HUGE! The dollar has literally fallen out of bed overnight… And the European traders are adding insult to injury! Go ahead and skip down to the currency roundup and take a peek at those currency levels. This is a day to remember, folks… And it’s not just the high yielders plus euros that have gained versus the dollar. Shoot Rudy, even Japanese yen (JPY), and Swiss francs (CHF) have joined the party!

It’s difficult for me to write just now, as I’m so hopped up on these currency levels… But calm down, Chuck, you’ve got the rest of the newsletter to write!

The Reserve Bank of Australia (RBA) met last night. The recent data (like inflation rising above the 2% target, and the 33-year low in unemployment) suggests that the RBA should look to raise rates 25 BPS… And that’s exactly what they did! Somehow I was thinking that they would wait, given the fact that it’s an election period, and the current leading party is behind in the polls… I don’t like to think that politics could strong arm the RBA, who in my mind has been a very good prudent central bank.

So… It looks as though that didn’t happen, and the RBA remains a prudent central bank! Now the question is… Will this rate hike be the springboard to Aussie dollar parity? Probably… But then you never know! Here’s where I have to legally tell everyone that this is simply how I see it… I’m not guaranteeing this move!

The last meeting of the Reserve Bank of New Zealand (RBNZ) did not yield a rate increase, but I fully expect more rate hikes here as we go along into 2008. The RBNZ yesterday, released its Financial Stability Report, a twice-yearly report assessing the health of the New Zealand financial system.

RBNZ Governor Bollard, who I must admit I have not had a lot of love for, dating back to last year when he was selling kiwi to stem its rise, and his deputy Dawg, Mr. Spencer believe that the New Zealand financial system is resilient… And I agree! Now… If this resiliency could do anything about the trade deficit!

The price of oil rose again, this time to $98… OUCH! There was an attack on a Yemeni oil pipeline and that brought about questions and concerns about supplies as we head into the winter heating season. In addition, OPEC is reluctant to pump more crude into the market at this time, and that too has oil prices bubbling.

It sure looks as though risk aversion had set in before the Asian ambush on the dollar last night…  Safe haven, and flight to quality trades seemed to be making their way on this stage. When you see this combination of accommodative monetary policy and risk aversion, you can bet that it is conducive to a strong gold market. So… As long as the financial markets remain fragile (the credit and liquidity crunch headlines this) and risk aversion is present, gold prices will be the beneficiary.

And look at that gold price! WOW! $845!!!! And silver at $16!!! I’d say they are the beneficiaries alright!

My pal (NOT!) former Fed Chairman, Big Al Greenspan was back in the news again yesterday… This time he was calling for a reduction of home inventories. Big Al said, “the critical issue on the whole subprime, and by extension, the international financial system rests very narrowing on getting rid of probably 200,000-300,000 excess units in inventory.”

OK… I’m not sure what the “big guy” was smoking, but just how in the world would we do that when we’re in the middle of a housing meltdown, and credit crunch? Of course he didn’t offer up any suggestions of “how”.

Big Al went on to say, “the dollar will fall further against East Asian currencies.” Hmmm, I won’t argue with him there!

The pound sterling received some bad news in the way of weak data yesterday, but did that stop the currency from gaining on the dollar? NO! The thing here is simply that pound sterling/cable as traders call it, isn’t the dollar! And how about 2.10 for pound sterling/cable? WOW! Just last week I wrote about how I had given up the ghost on 2.10 after the Northern Rock episode, but lo and behold here it is, in all its glory! 2.10… sound the trumpets; bring out the choir to sing!

I really don’t like it when we get to that type of trading… I truly prefer to be able to talk up the fundamental reasons you like buying a currency, other than to say, “It’s not the dollar!” But, if that’s what we’re heading toward… So be it!

With this huge rise in the euro, I can’t see the European Central Bank (ECB) raising rates tomorrow. ECB President Trichet is between a rock and, well… Another rock… As he watches inflation creep higher in the Eurozone economy, but hears the calls for an end to his rate hike cycle because of slower growth. I was of the opinion that he would go ahead and raise rates to fight inflation, and worry about slower growth later – the complete opposite of his counterpart in the U.S., Big Ben Bernanke. But now… Trichet can sit back and see how well this strong euro fights inflation for him.

Besides… 1.50 now seems like a hop, skip and a jump away. I know the level is a psychological level, but with this huge jump today, one would probably observe this “psychological” level as merely a stair step to 1.55.

OK… I can’t wait to get this Pfennig out today, so I’ll head to the Big Finish!

Currencies today: A$ .9380, kiwi .7850, C$ 1.10, euro 1.4675, sterling 2.1030, Swiss .8840, ISK 58.80, rand 6.48, krone 5.2850, SEK 6.3030, forint 172.64, zloty 2.4750, koruna 18.3370, yen 113.10, baht 31.57, sing 1.4420, HKD 7.7660, INR 39.30, China 7.4440, pesos 10.7260, BRL 1.7390, dollar index 75.26, Oil $98.16, Silver $16.07, and Gold… $845.30

That’s it for today… Sure hope you are diversified, because these are the things that can happen when a currency has the awful fundamentals that the dollar has! Again, thanks to all those wonderful people that sent me notes yesterday, and for that matter every day… I can’t begin to tell you how great they make me feel when I read them… I have to stay at home today… But that will be OK, because Wednesday is my beautiful bride’s day to have our little granddaughter, Delaney Grace. Think I’ll go back to bed now… Have a great Wonderful Wednesday!

Chuck Butler
November 7, 2007

The Daily Reckoning