Dollar Bulls Take a Breather

Good day… Just as Chuck predicted, we had a Thundering Thursday yesterday, as thunderstorms moved into the St Louis area early yesterday and are expected to stick around throughout the weekend. Yesterday was a pretty slow day in the currency markets, with the dollar trading in a fairly tight range, but overnight the dollar changed direction and we saw it lose ground across the board for the first time in weeks. This turnaround was seen in the European markets as traders finally started to realize that the speed of the increase in the U.S. dollar was overdone.

But before I get going this morning, I need to run a public service announcement for Chuck. Yesterday’s Pfennig announced that the Reserve Bank of New Zealand cut interest rates 0.25%. This was in error; the bank actually cut 0.50% to a rate of 7.5%. Chuck realized his error just after hit the send button, and wanted to make sure I let everyone know. (He received more than a few emails from readers letting him know his error). The extra quarter point cut was aimed at giving the New Zealand dollar (NZD) a good jump start, and Governor Alan Bollard is indicating that more rate cuts will be on the way: “We’ve got room to move… We’re in a loosening mode.” The reaction of the currency markets was the same with a 50 bps cut as it would have been with a 25 bps cut; they sold off the kiwi as the interest rate differentials narrowed.

The dollar bulls took a breather overnight, and the dollar index dropped back below 80 in early European trading. It seems that the European traders are less ‘comfortably numb’ than investors here in the United States. The dollar was taken to the woodshed by European traders after the U.S. Treasury announced yesterday that the budget deficit in the first 11 months of the fiscal year rose to a record. With the government bailout of Fannie and Freddie, the budget outlook here in the United States continues to deteriorate at an unbelievable pace. And with Hank Paulson continuing to tap into what he views as the unlimited credit of the U.S. taxpayer to guarantee failing financial firms, the debt looks like it will continue to pile up. Eventually, investors are going to start to question the ability of our great country to pay back all of the debts which we continue to amass. Treasury Secretary Hank Paulson is out of control, he is like a teenager who just got his first credit card and takes all of his buddies to the shopping mall. His answer to any financial crisis? Just use the good credit of the U.S. taxpayers to shore up the markets.

Chuck had Paulson’s rescue on his mind last night when he sent me the following to share with readers today:

“OK, the big story I brought you the other day about the Credit Default Swaps and all the bad stuff that could have come from a ‘default event’ just didn’t pan out that way, and I guess we can thank our lucky stars. Yes, $1.4 trillion in Credit Default Swaps were settled, but in a far different manner than originally thought. Once again the government stepped in, and ‘took care of the matter’ so that Wall Street didn’t crumble to the ground.

“The problem here folks, is simply that the $1.4 trillion of Credit Default Swaps on the books of investing financial firms is now a government guarantee for Fannie and Freddie debt. So, they bailed out the ‘boys’ that had booked BIG FEES on these Credit Default Swaps. I guess when one looks at it closely, it’s probably a good thing that the catastrophic event didn’t happen. But… You know me, and I’ll always find a chink in the armor…

“And here it is… Guess where the money came from to pay for all of this? Remember that printing press in the basement at the Federal Reserve that Helicopter Ben Bernanke told us all about a couple of years ago? Well… It got a work out! So… More debt is being put on the books of the government… And more dollars are being printed, so that those loans can be paid back in the future with cheaper dollars!

“I want to make something perfectly clear here… I, in no way, want to see the financial markets ruined. But, what I would like to see is a government that didn’t feel as though every market event is something they need to take on their books… Which in turn are OUR books! And, I’m writing a letter to my congressmen and asking them why. Was it that the people, who were elected to represent me on issues like debt, were not involved in this decision? Was it legal? Was it constitutional? Ron Paul doesn’t believe it was constitutional, the bailout of Fannie and Freddie. I heard him say so on the Glenn Beck show Wednesday night! I would think tax payers would all be contacting their representatives and asking them about this!”

Hank Paulson is piling up IOUs for the U.S. consumer almost faster than the printing presses can spit out new dollars. Unfortunately the U.S. taxpayers will be paying for the financial mistakes made by his Wall Street buddies for a long time. Can you believe that just eight years ago the United States had a budget surplus? Yes, President Bush was handed over a budget surplus, and is leaving the next administration with the largest budget deficit ever.

The best performing currencies over the past day have been the Norwegian krone (NOK) and Swedish krona (SEK), both of which have gained nearly 1% versus the U.S. dollar in the past 24 hours. Sweden’s Riksbank lifted its main interest rate 0.25% last week, as it keeps a hawkish eye on inflation. The interest rate in Sweden is only topped by the New Zealand dollar, Aussie dollar (AUD), and Norwegian krone among the Group of 10 nations. So both Norway and Sweden not only have good solid economic fundamentals, but they have some fairly attractive interest rates.

While almost every currency rebounded a bit against the dollar, the Japanese yen (JPY) got sold. This was a result of carry trades being put back on as speculation of a possible purchase of Lehman Brothers Holdings stabilized the markets. Apparently the U.S. Treasury and Federal Reserve have been working with Lehman on a sale, and a deal could be announced as early as next week. These newest rumors regarding Lehman gave investors the confidence to take on risk again, so they returned to their carry trades. The crosses proved that investors were selling yen and buying the higher rate currencies of New Zealand and Australia.

But the Aussie dollar also got a boost from some stronger than expected data yesterday. A government report showed that Australian employers hired almost three times as many workers as economists forecast in August. The good employment report caused traders to reduce bets that the Reserve Bank of Australia would reduce rates at its next meeting on October 7th. An end to the downward spiral of commodity prices is what is needed to really stem the sell off of the Aussie dollar. Raw materials account for 60% of Australia’s exports, and sales of commodities such as lumber make up 70% of New Zealand’s overseas shipments. Demand in Asia (especially China) will determine if these commodity-based currencies can sustain a turnaround. A rebound in commodity demand will help the Aussie dollar, especially if the Reserve Bank of Australia decides to hold off on any more interest rate cuts. Unfortunately, the outlook isn’t as good for the kiwi as Governor Bollard continues to talk about further rate cuts in New Zealand.

I was driving my son to hockey practice last night and we had our typical discussion on how our days had gone. Brendan is just 12 years old, but has a pretty keen interest in what his ‘old man’ does, and actually invested some of his birthday and Christmas money into our silver pooled accounts a few years ago. I had to break the news to him that silver was down to below $11 per ounce, and expected him to be upset, as he had been thrilled when silver was up over $20 per ounce earlier this year. But instead of being upset, he was excited! He told me that he was wanting to purchase more, and now that is was back down below $11 he had was going to be able to buy even more silver with his investment. He asked me if I still thought it was a good investment in the long run, which I do, so he gave me an order to purchase some more at these lower prices. I guess sometimes it takes a child’s wide-open way of thinking to bring everything into perspective. The sell off in these currencies and commodities won’t last, and smart investors are going to take advantage of these bargain basement prices.

Currencies today 9/12/08: A$ .8073, kiwi .65695, C$ .9335, euro 1.4097, sterling 1.7688, Swiss .8806, ISK 90.89, rand 8.159, krone 5.7557, SEK 6.7515, forint 170.13, zloty 2.3914, koruna 17.304, yen 107.25, baht 34.68, sing 1.4361, HKD 7.7977, INR 45.72, China 6.8441, pesos 10.5913, BRL 1.8125, dollar index 79.49, Oil $102.14, Silver $10.82, and Gold… $753.33

That’s it for today… Chuck goes in for a scan today, so please include him in your thoughts and prayers this morning. It seems like these semi-annual visits to the hospital to get scanned would be pretty tough to go through. I don’t mean the physical part, (Chuck is more than used to getting poked and prodded by now!) but the mental side of it seems like it would be hard to handle. And he won’t get the results until sometime next week when he is on the road with FXU. But Chuck is handling it just like he has handled the disease all along, with an incredibly positive attitude. His strength is really an inspiration to all of us. Good luck Chuck! Our fingers are crossed!! Hope everyone has a Wonderful Weekend.

Chris Gaffney
September 12, 2008

The Daily Reckoning