Dollar Shoots Up On Strong Inflation Numbers

Good day… Chuck and I swapped spots, as I’m back to work from a couple of days off and Chuck is off to his Christmas vacation. The U.S. dollar shot up in overnight trading after trending stronger through most of the day. U.S. data releases gave the markets direction yesterday, and the data is pointed toward a surprisingly strong U.S. economy. November retail sales rose 1.2% – twice as much as economists predicted. A separate report showed prices paid to U.S. producers climbed 3.2%, higher than most anticipated. Both figures were consistent with the Fed’s prediction a couple of days ago that the economy will expand at a ‘moderate’ pace next year, while energy and commodity prices may stoke inflation.

But don’t count on sales staying strong. Industry reports suggest spending will likely weaken in December, and several companies have been issuing profit warnings. The National Retail Federation has predicted the smallest holiday sales gain in five years. And while consumers have been surprisingly resilient, the spending they are doing is undoubtedly being funded by credit.

Yesterday’s PPI data is our first real sign of the next big bubble – rising inflation. Today we will see if the higher PPI numbers carried through to higher consumer prices. If CPI rises in conjunction with PPI, look for the markets to start to question further rate cuts. But as Chuck has said several times, our FOMC looks like they are no longer worried about inflation, but are more focused on how to solve the credit crisis. The currency markets will still be looking at the CPI data and the currency markets have moved the dollar up versus just about every currency on this inflation data.

But I believe the dollar has moved too far too fast on the increasing inflation numbers here in the United States. European inflation was also reported this morning, and showed prices accelerated more than initially estimated in November, to the fastest pace since May 2001. The inflation rate in the 13-nation euro area rose to 3.1% from 2.6% in October, exceeding the 3% estimate. German inflation accelerated in November to the fastest pace in 12 years. This data should quash any thoughts that the ECB will be following the United States, BOE, and Canada in cutting rates. ECB President Jean-Claude Trichet said December sixth, that some governing council members favored raising interest rates.

But the direction of the euro (EUR) was already in place prior to the release of this report, and after breaking through a key support at 1.4650 the euro dropped all the way to trade below 1.45 for the first time in over a month. But currency traders look like they are coming in and buying at the ‘blue light special’ prices as the euro has pushed back above 1.45.

Norway’s krone (NOK) rose as the Norges Bank rose interest rates 0.25%, the seventh interest rate increase since January. The krone is the second-best performer amount the major currencies in 2007 and looks like it will continue its excellent performance going into 2008. The currency should be strong, given the excellent shape of Norway’s economy. They have used their oil revenues to pay down government debt and have fully funded a somewhat liberal government sponsored pension plan. Norway’s economy grew at an annual rate of 6.6% in the third quarter, the fastest pace since 1985.

While Norway’s central bank decided to raise rates, the Swiss franc (CHF) fell to a one month low against the dollar as the nation’s central bank kept interest rates unchanged for the first time in two years. The central bank had been on an aggressive plan to raise rates in the face of a strong economy and increasing inflation. But uncertainty over the subprime mess caused the Swiss National Bank to keep rates on hold.

And finally, Former Federal Reserve Chairman Alan Greenspan was back in the news yesterday, as he increased the chance of our U.S. economy slipping into a recession to 50% from his former estimate of 35%. In an interview with National Public Radio yesterday, Greenspan said the risk of a U.S. recession is increasing and that economic growth is ‘getting close to stall speed.’ I also read where Greenspan is finally owning up to actually causing some of the massive imbalances we currently face. He admitted his Fed should have been more proactive in their policies to combat the housing price bubble, and shouldn’t have kept rates so accommodative for so long.

Currencies today: A$ .8698, kiwi .7753, C$ .9765, euro 1.4516, sterling 2.0247, Swiss .8696, ISK 62.63, rand 6.8278, krone 5.4974, SEK 6.5087, forint 174.58, zloty 2.4938, koruna 18.212, yen 112.99, baht 30.17, sing 1.4468, HKD 7.7986, INR 39.35, China 7.3634, pesos 10.8398, BRL 1.7859, dollar index 77.09, Oil $92.45, Silver $13.93, and Gold… $792.20

That’s it for today… If you have been waiting for some dollar strength to get back into the currency markets, today is your day!! The blue lights are flashing in the currency aisles. Sad day for baseball yesterday as the Mitchell report detailed just how bad roids have infested our national pastime. But I was glad to see no current Cardinals were named; and the first step to cleaning up the problem is to admit there is one! We are supposed to get our first big hit of snow over the weekend, they say we could get up to six inches in some areas. I hope everyone has a Fantastico Friday and a wonderful weekend!!

Chris Gaffney
December 14, 2007

The Daily Reckoning