Dollar Negativity Gets Strong

Good day… A beautiful day at the ball yard yesterday was almost ruined by some very lifeless and shoddy play by my beloved Cardinals. It was a beautiful day though, so I had that going for me!

The dollar doesn’t have much going for it these days. The negativity is really building once again, and it finally looks as though the dollar has returned to the depths of the weak dollar trend. Overnight, the euro has traded over the 1.36 handle. And sterling? The belle of the ball yesterday, as it hit the 2 level, has added to those gains and moved to 2.01! Even Japanese yen has gained one whole figure!

When I talk about the negativity in the dollar, you can simply look at how not only the currencies, but also gold has pushed higher this week, even in the face of some surprising strong earnings and a resilient stock market.

However, the data cupboard’s yield yesterday didn’t help the dollar’s cause any. First of all that stupid CPI said that inflation ex-food and energy (which is what the markets and media focus on for some strange reason) only gained 0.1% in March, and fell to 2.5% year-on-year… RIDICULOUS! Of course the overall CPI including those things we use everyday rose 0.6% in March, which is still RIDICULOUS! Inflation is eating us alive.

One of my fave economists, John Williams of “Shadow Statistics” fame (whom I’ve talked about several times in the past), says we are already in an inflation recession. And when John Williams says something, I listen!

OK… That wasn’t the real kicker yesterday though. Industrial Production fell in March 0.2%, revising February’s result down from 1% to 0.8%. This brings the year-on-year number to the lowest it has been since Katrina. UH-OH! And capacity utilization, one of the few forward-looking pieces of data we see, fell too! UH-OH!

But let’s get back to the currencies, because they are the stars today. The pound sterling continued to move higher throughout the day yesterday, but really saw a bounce higher when the minutes from the last Bank of England Monetary Policy Committee meeting were printed. The minutes revealed that two members voted to raise rates. But there will be more voting for higher rates now that they’ve see today’s report, which showed that U.K. earnings have grown at the fastest pace in three years.

Let me say, that in my opinion the 2 level was a very important figure to get through for the pound sterling. But I just don’t see it stopping there. I wrote some time ago that I thought we would see at least 2.05 from the sterling, and depending on the dollar negativity at the time, it could see the thin air of 2.10. Well, dollar negativity is strong…

And one more thing, especially for those that doubt the Bank of England has the intestinal fortitude to raise rates again… I think the U.K. Treasury is sounding a lot like Ricky Ricardo these days, and calling out the Bank of England. OK, come on, do this in your best Ricky Ricardo voice… “Lucy… You’ve got some ‘explainin’ to do!”

What am I talking about, I hear you asking? Well, yesterday, it was reported that U.K. inflation had tipped the scales at over 3%. At 3.1%, the Bank of England knows that their job for May is to hike rates! Oh, and one more thing about sterling this morning… At 2.01, it has reached a quarter-of-a-century high! That’s right, it’s been 25 years since it last saw this level. WOW!

And how about that euro? The other day, I told you that German Investor Confidence had printed a positive report. And now German Business Confidence has bounced higher too! It’s all good for the euro – so we no longer have to point out that the euro is the offset currency to the dollar and end there – now, we can point to a growing economy, relatively attractive interest rates, and an even stronger euro!

Gold is within’ shoutin’ distance of $700 again, and base metals are still surging, especially copper which is soaring. But the main source of fuel for gold these days is simply the weaker dollar. I don’t, for a minute, think gold will stop here… Do you?

Last week, I told you about how the Aussie dollar had reached a 17-year high. Well, last night, kiwi reached a 22-year high! Inflation in New Zealand has bounced higher than the Reserve Bank of New Zealand’s (RBNZ) ceiling target, as their CPI rose 0.4% in the fourth quarter, which is double what was forecast for inflation. The surge in commodity prices is really throwing a spanner in the RBNZ’s plans, and interest rates here will have to go up too, thus driving kiwi even higher.

The recent strong rally by the Indian rupee was halted overnight, and it is rumored that the Central Bank intervened to stem the rally. Still, the rupee is strong at 42.04. I think you can expect to see the Central Bank step in from time to time to stem the strong moves by the rupee, but come on, isn’t this better than watching the Chinese water torture in renminbi trading?

Currencies today: A$ .8370, kiwi .7470, C$ .8845, euro 1.3610, sterling 2.0110, Swiss .8310, ISK 64.95, rand 7.0670, krone 5.95, SEK 6.77, forint 180.70, zloty 2.80, koruna 20.57, yen 118.50, baht 32.60, sing 1.51, HKD 7.81, INR 42.04, China 7.7210, pesos 11, dollar index 81.62, Silver $14.01, and Gold… $690

That’s it for today… Another crazy day on the desk yesterday, shoot, I was even taking calls before I left to go to the game! Back in the trading saddle today though, all day! My little buddy, Alex finally got to play a baseball game last night after several rainouts. His baseball game was preceded by tackle football camp. He came home one tired dude! Our Sue (Suzie Q, as I call her) is heading to San Diego tomorrow to meet her son, as his aircraft carrier returns to the United States. She’s so excited about going!

The data cupboard is empty today, so on that note, I’ll hit the send button… Have a great Wednesday!

Chuck Butler — April 18, 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.

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