Dollar Negativity Builds Steam

Good day… And a Happy Friday to one and all! This has been a good week fro the currencies, and a bad week for the dollar. The dollar negativity is building steam. The question is: Will the steam be released in a relatively slow coordinated manner, or will the top blow off this sucker?

I have to tell you that I came across some data yesterday that explains why this dollar negativity is building steam. We all know that the Central Banks of the world have truckloads of dollar reserves, right? Well, the proportion of dollars in Central Bank reserves continues to fall. Data from the IMF shows that the dollar proportion of Central Bank reserves fell to 64.75% in the fourth quarter of 2006, which doesn’t look good, given that the number was 66.75% in the fourth quarter of 2005. To my way of thinking, there is little reason to believe that this trend will change given the talk and actions in the past year by Central Banks.

The euro and sterling saw some profit taking yesterday, but that didn’t last long, and soon those two were back to taking liberties with the dollar. You see, the U.S. data cupboard didn’t give the dollar any love yesterday.

First, we had leading indicators for March, and while the March number posted a 0.1% increase, February’s -0.5% showing was revised downward to -0.6%. On the downside, capital goods orders fell (highlighting the fairly new concerns about business investment), and consumer expectations fell. I’m really concerned about the Capital Goods Orders falling.

The Philly Fed Index showed a 0.2 gain. But 2.0 was expected, thus disappointing those that thought the Philly region would show some manufacturing gains. The crazy, and volatile Empire Index (NY region) also showed some rot on the vine in its last report, so… One has to believe the overall national ISM Manufacturing Index will fall below the 50.9 figure it posted earlier this month. Remember… 50 is the line in the sand that indicates whether manufacturing is contracting or expanding. Also remember that the Fed has never raised rates when the index was below 50 (contracting).

So… Last Friday, we had a nice “pop” in the currencies. And then again on Tuesday this week we saw another “pop”… Building bases before moving higher. This is a good, strong way for the currencies to maintain their performance versus the dollar.

Well… Yesterday, I told you that some in the markets were saying the global sell off of stocks could be the beginning of the unwinding of the carry trade, which was responsible for the rally in yen, and the Aussie and kiwi being back on their heels. I also told you that I didn’t believe the carry trade was unwinding, and probably wouldn’t for some time to come.

As I turn the currency screens on this morning, I see that yen is back to the 118.60 level, and Aussie and kiwi are regaining lost ground. The carry trade lives – and as I just said, it will continue for some time, in my opinion. But that doesn’t mean it’s a ONE-WAY street. There will be bouts of volatility, and false dawns on the end of the carry trade. So, as long as we’re aware of this, we won’t panic like some in the markets did yesterday!

My friend, the Mogambo Guru, was talking about energy in his weekly letter that’s posted here at the Daily Reckoning, and the Mogambo said something that hit a nerve with me…Let’s look at what he said.

“The sad-but-funny part is that turning corn into ethanol requires as much as 70% of the energy that comes from the ethanol itself! HAHAHAHA! The only worse choice would have been wheat, which needs about 90%.

“It would have been much, much better (and seemingly a lot smarter) to get ethanol from sugar cane (10%), or cellulose (25%), or soybeans (37%) or even rapeseed (40%)! But we chose corn at 70%? We’re idiots!”

He always thinks of the right words to say! HAHAHAHA! But, this story goes deeper… Brazil figured out the sugar cane ethanol thing in the ’70s – but here we are still fooling around with corn! And corn also requires a ton of water to make ethanol… Sad, but true, folks.

OK… That was my venture into talking about energy.

Speaking of energy… The price of oil is really moving higher again. I mentioned the cost of gas the other day, when I said I had filled up my gas tank on the way to work. But it’s gone even higher since then. Now there’s violence in Nigeria again, and OPEC supplies are rumored to be falling. I talk about this energy stuff, because it all plays well with my ranting yesterday regarding how inflation was eating us alive.

The U.S. data cupboard is empty again today, so the markets will have to close the week with no data to look to for direction. Of course, I would just tell them (if they asked me) that they don’t need no stinkin’ data to get a direction for the dollar!

I head out to Las Vegas next Tuesday, for an International Living Conference. These people at the International Living Organization have always been kind to me, and have invited me to their conferences to speak. I’m one of the few speakers at these conferences that isn’t trying to sell a piece of property in some exotic part of the world… And I like that!

Currencies today: A$ .8350, kiwi .7450, C$ .8865, euro 1.3610, sterling 2.005, Swiss .8290, ISK 64.55, rand 7.02, krone 5.9575, SEK 6.76, forint 180.25, zloty 2.7850, koruna 20.55, yen 118.60, baht 32.40, sing 1.51, HKD 7.8140, INR 41.83, China 7.7175, pesos 10.97, dollar index 81.65, Silver $13.88, and Gold… $690.80

That’s it for today… Today is the Big Boss, Frank Trotter’s birthday! YAHOO! I always tell my audiences that Frank and I have worked together for so long that the Dead Sea wasn’t even sick when we met! HAHAHAHA! But, he’s amazing… He still looks young, while I get older-looking every day! So… Happy Birthday Frank! And, tomorrow is our accountant, Mary Owens’s birthday. A busy weekend with football for my little buddy, Alex, and at least it’s not raining for once! YAHOO! Time to get this out the door, so have a great Friday and weekend!

Chuck Butler — April 20, 2007

Chuck Butler is the senior vice president of EverBank World Markets. He oversees the trading desk and operations for over 12,000 individual and corporate clients, both in the United States and abroad, who look to EverBank for FDIC-insured World Currency Deposit Accounts, and Single-Currency and Index CDs .

Chuck is the author of The Daily Pfennig, which is reposted here at The Daily Reckoning. His respected analysis is frequently quoted in or referenced by: the Wall Street Journal, U.S. News and World Report, CBS Market Watch, USA Today, CNNfn, the Chicago Tribune and many other publications.