Good day. Well, this is FOMC meeting week. Whoop-de-do! I’m so excited! Not! Aren’t you? Oh, wait, you’re not? You must be one of the few left on the face of the Earth that are concerned that the Fed rate hikes are going to bring your economy to a screeching halt!

Welcome to this week, a week where I’m convinced that I’ll be at my smart-alecky best! I can’t wait to hear what Big Ben has to say on Thursday. I’ll bet a dollar to a Krispy Kreme that he’ll be so full of baloney a local deli will be wondering what happened to their stash!

The Bank for International Settlements issued their annual report today, and they sound like they have been reading the Pfennig! Recall when I screamed at the wall regarding how the Fed took too long to begin raising rates, and how they should have nipped inflation in the bud with larger rate hikes? Well, the BIS agrees. Here’s snippet: “It could be that monetary policy should have been tightened more and earlier. More disruptive effects could still materialize.”

OK. Currencies. Yeah, that’s what I need to talk about now. The dollar had the euro on the run Friday, until the durable goods for May printed and showed more rot on the economy’s vine. Durable goods in May fell 0.3% when they were forecast to rise 0.4%. When is someone at the Fed going to stand up and point out all this proof that the economy is slowing? Anyway, focus, Chuck. Right. The euro had actually fallen below 1.25 before the report printed, but turned on a dime after the printing. It has gained a bit more in the overnight markets.

So, how the euro goes, pretty much dictates how the rest of the currencies behave. Oh, be-have! Sorry, couldn’t pass up that Austin Powers bit. Anyway, I’m surprised to see the euro gaining ground this morning, given the fact that it had been sold leading up to the FOMC meeting week. But, now that we’re here, it gets bought. Strange days indeed!

A European central bank minister was out trying to keep the markets off the scent of future rate hikes. The minister, Mersch, said that the “ECB is not wedded to quarterly pace of rate increases.” Well, in my opinion, since he took the time to say that, it probably means that a quarterly pace is in the cards!

The emerging-markets currencies just can’t seem to catch a break these days. I know, I said last week that there were some signs that the risk aversion could be ending, but instead, it went the other way. We are seeing deep, dark risk aversion. They are melting down. The South African rand has been hit the hardest in the latest round of selling. It has lost 6% in the last five days! Of course, with gold not performing well the past month, it adds an additional burden on the rand.

Our friends over at Lehman Brothers issued a report today that tells us that central banks around the world reduced their allocation of dollars in their reserves during the past year from a 72% average to 68%. That’s a big jump. I’m afraid that’s just the beginning of the move away from a dollar-denominated currency reserve by central banks, which will lead to reduced dollar assets held by institutions in those countries and so on. But, that’s just me thinking aloud!

Someone sent me a note last week, and said I hadn’t talked about Aussie dollars lately. Well, nothing has changed here. The Aussie dollar has gotten caught up in the sell off/correction in commodities. The economy in Australia still has the Goldilocks scenario going for it. In fact, I’m calling for a rate hike in Australia before the leaves turn to different colors. But unfortunately, you live by the sword (commodities), you suffer from the sword (commodities).

We had a nice showing in our MarketSafe Gold CD in June, but still not the numbers I think should be participating in this product. We just opened the doors to the July CD. So, what are you waiting for? Gold has corrected. These are cheaper levels to buy. It’s all there.

Today, we’ll see new home sales data from May. I can’t believe this bubble has been allowed to get bigger and bigger. Of course, that means the deflation of the bubble is going to glow hot air on more and more people! Anyway. It will be interesting to see what’s going on with housing.

Currencies today: A$ .7320, kiwi .6050, C$ .8945, euro 1.2570, sterling 1.8215, Swiss .8045, ISK 75.65, rand 7.44, krone 6.31, forint 223.81, zloty 3.26, koruna 22.70, yen 116.16, baht 38.47, sing 1.5970, INR 46.36, China 8.002, pesos 11.425, dollar index 86.50, silver $10.40, and gold $584.85

That’s it for today. Wednesday is my little buddy’s birthday. Long-time readers may remember when I wrote the Pfennig from home, and he was a toddler. Alex would sit on my lap and help me write. Sort of looked like this: opiuyoahgnlknt. Anyway, I always take him to breakfast on his birthday, so Chris will have the Pfennig on Wednesday. Chris is back from vacation today, so we have that going for us! Have a great Monday and week!

Chuck Butler
June 26, 2006

The Daily Reckoning