Dollar Drops After US Inflation Slows Slightly

Friday morning saw the dollar giving back more of the gains it had booked early last week and the greenback ended the week a bit weaker than it started. The CPI numbers were what sparked Friday’s selling, as the CPI came in a bit lower than forecasts. Consumer prices rose 0.4% in February, with just a 0.1% increase in the ‘core’ number (Ex. Food & Energy). The YOY gain was identical to the January reading at 2.9%, and the Core YOY figure was a bit lower at 2.2%. Apparently some of the currency traders felt these numbers may force the Fed to rethink their stimulus plans. Fed Chairman Ben Bernanke had indicated there would not be a need for another round of quantitative easing during the past few weeks, but the benign inflation data may indicate our economic recovery is in need of some additional fuel.

Another report released Friday showed that consumer confidence in the US dropped slightly, with the U of Mich. Confidence number falling to 74.3 versus last month’s reading of 75.3. Economists had predicted a rise in the confidence number to 76, so the fall held a bit more significance. Other data released Friday showed Industrial Production was flat last month, and one of Chuck’s favorite pieces of data, Capacity Utilization, moved down just slightly at 78.7%. All of this data would seem to support our feeling that the US economy is on the path of recovery, but is definitely taking the long ‘scenic’ route. With this being an election year, the administration is going to want to try and steer the recovery into the express lanes. I’m sure there is going to be mounting pressure on the boys and girls at the Fed to come up with another round of stimulus.

This week’s US economic calendar is pretty light with a definite slant toward the housing market. Today we will see the NAHB Housing Market Index which is expected to have risen slightly to 30. Tomorrow will bring Housing starts and Building permits for the month of February, both of which are expected to be just slightly higher than the previous month. Wednesday will bring the Exisiting Home sales data which again is expected to have risen by 0.7% MOM. Thursday will bring the House Price Index and the Leading Indicators along with the regular weekly jobs numbers. And appropriately we will close out the week on Friday with another piece of housing data, the New Home Sales figures. The importance of housing on the US economy is well documented after the bursting of the housing bubble a few years ago, so while there isn’t a big volume of data this week, any surprises would definitely shake the markets.

I read a report over the weekend on what some say is a growing housing bubble in Norway. The fundamentals of Norway’s economy remain solid, and many investors have turned to the Norwegian krone (NOK) as an alternative to the euro (EUR). This has helped the krone rise over 4% versus the US dollar since the beginning of the year. But the recent rise in the NOK isn’t what the country’s leaders want to see. As Mike reported in the Pfennig last week, Norway’s central bank surprised the markets with a 0.25% cut in rates. (By the way, Mike did a terrific job Pfilling in, didn’t he? THANKS MIKE!)

Norges Bank Governor Oeystein Olsen said he wants to keep the krone from appreciating too quickly, and would use the bank’s main interest rate to try to stem the recent appreciation of the krone versus the euro. But the Norges bank officials seem to be fighting against a strong current with oil prices rising and the European debt problems pushing Norway’s currency higher. The cut in Norway’s interest rate could inflate what some say is a growing bubble in the housing market. I question why the Norges bank leaders would risk inflating a housing bubble in an attempt to keep the currency from appreciating. Apparently they feel a 4% increase in the value of the krone was too much, as their largest export (oil) is priced in US dollars so any increase in the value of the krone/dollar is amplified in the Norwegian economy. I don’t think a 0.25% cut should cause investors to turn away from the NOK, but you may not need to look far if you do want an alternative.

Norway’s Nordic neighbor doesn’t share their concern regarding currency appreciation. Sweden’s Deputy Governor of the Riksbank, Per Jansson, said they wouldn’t react to the ‘mild’ appreciation they expect to see in the Swedish krona (SEK), and sees no threat to the economy stemming from the exchange rate. “We expect a rather mild strengthening from the current level, and that shouldn’t be any problem whatsoever for the Swedish economy,” Jansson said in an interview last Friday. “I do not expect any big drama surrounding the krona.” Good news for US investors looking for a place to diversify out of the US dollar.

An IMF official said China would avoid an economic ‘hard landing’, agreeing with what we have been saying all along. “China is heading for a soft-landing” according to Zhu Min, a deputy managing director at the IMF. Zhu said he expects the slowdown in emerging-market economies to stabilize over the next few months. Recent data coming out of China show that the property bubble is deflating, with prices falling in most of the nation’s major cities. Concerns with the slowing Chinese economy continue to dominate the commodity markets. I constantly read pieces that predict the Chinese economy is going to collapse, bringing commodity prices crashing down with it. But the data continue to show that the Chinese economy is not collapsing, but is rather slowing in a more controlled fashion. This controlled slowdown was needed to offset property bubbles that have been growing, and the recent drop in prices is certainly encouraging.

The news helped propel the Australian dollar (AUD) back above $1.06 for a while, this morning. Reserve Bank Governor Glenn Stevens expressed confidence in China’s economic growth. Stevens predicted China would ‘grow pretty strongly’ in a speech today. “The slowdown in Chinese growth from 10% to a mere 8% is a major talking point, and some see it as portending a major crash,” Stevens said. “But some slowing was required to reduce inflation and, therefore, put growth on a more sustainable path.” Wow, not only the IMF but AUD Governor Glenn Stevens is also agreeing with the Pfennig! A good day!

Gold also benefitted from the positive news in China. As Mike reported last week, buyers are continuing to take advantage of any price drops, and gold bounced back from its weakest level in two months. Gold had fallen over 3% last week, its second biggest weekly decline this year, but is moving back up this morning. India, the world’s largest consumer of the precious metal, announced an increase in customs duty on gold and platinum, Friday, which sparked a bit of panic buying by consumers before the increase took effect. Both gold and silver are trading very close to Friday’s levels, with gold down $2.64 and silver flat.

To recap… The dollar dropped on Friday, giving back all of the gains it had booked at the beginning of the week as inflation cooled slightly. Housing is the main focus of this week’s economic data in the US. A possible housing bubble didn’t keep the Norges bank from cutting rates, and China seems to have deflated a bubble of their own. Officials at the IMF agree with the Pfennig that China will have a ‘soft landing’ and the news helped the commodity currencies, which rely on Chinese growth. Gold bounced back after another weekly loss and is trading a bit higher this morning.

Chris Gaffney
for The Daily Reckoning