Housing Slumps…

Good day. I’m running late this morning, as I was locked out of our building.  Thank goodness for Mary O. who is always early to work!  Hopefully I will still be able to pack this one full of good info.

The dollar continued to rally overnight and is ending the week stronger than it began vs. just about every currency.  The weekly jobless claims released yesterday showed a slight pick up in employment as they fell from a revised 319k last week to 310k this week.  I don’t believe this improving labor market will be enough to override a housing market that continues to sink and an economy that is clearly slowing.  U.S. home prices will likely fall for the first time since 1993, according to a report released yesterday by the National Association of Realtors.  The report points to a record number of homes for sale with more new inventory coming available.

SF Federal Reserve Bank President Janet Yellen was defending the FOMC’s pause from two years of interest-rate increases and said inflation may recede “faster than many forecasters expect.”  You know our opinion on inflation (if not, you can read it in the latest EverBanker newsletter), but Yellen continues to warn that the most recent increases by the Fed have not yet been fully felt.  “With lags in policy we haven’t yet seen the full effect of our past actions.”  Sounds like she is already voting for another pause.

While our own central bankers seem to be leaning toward keeping rates unchanged, the ECB is signaling it may not be finished raising interest rates this year.  Policy makers, including ECB President Jean-Claude Trichet, Germany’s Axel Weber and Yves Marsch of Luxenbourg have stepped up their inflation-fighting rhetoric, suggesting they’ll raise rates into 2007. The currency markets have not yet priced further rate increases into the Euro, so I would expect some additional strength vs. the U.S. dollar through year-end.

The Yen performed better than all other currencies yesterday, holding its own against the U.S. dollar after the German Deputy Finance Minister Thomas Mirow said the Japanese currency’s weakness will be a topic of G7 talks next week.  The Yen rallied in April after the last G7 when officials said Asian countries, especially China, need to let their currencies gain and should rely less on exports.

The Yen also received some support from expectations that the BOJ will signal a more hawkish opinion after a two-day meeting starting today.  The BOJ is not going to raise rates at this meeting, but will probably signal further rate increases will be necessary.

Ty Keough, who sits next to me on the trade desk, brought the following to my attention.  It is from Doug Casey who wrote an article in the latest Review and Focus.  I think you will enjoy reading his opinion on the fate of the U.S. dollar:

“Similarly, foreign owners of the big green mountain of U.S. dollars have become uneasy and generally are looking to sell. There’s no dumping, at least not yet. When it comes, the flight from the dollar will start slowly, then gain momentum before moving into a blow-off. Like a glacier sliding toward a cliff, movement that seems inevitable may take a puzzlingly long time to get underway. But once it does, things speed up at a surprising rate. Most of what happens happens rapidly, toward the end of the process.

“Given the choice between (A) a dead housing market and scorched-earth depression in the U.S and (B) a collapsing currency, which at least has the virtue of reducing the real cost of paying off all those Treasury bonds, I’m forced to believe the U.S. government will choose (B) and sacrifice the dollar.”

You can certainly see Doug has an opinion (which melds pretty well with my own)!  If you haven’t read Mr. Casey’s columns before, go to www.caseyresearch.com for his full views on the world.

New Zealand’s dollar erased its earlier gains against the U.S. currency as investors sold it against its Australian counterpart.  The rate gap between these two ‘kissing cousins’ is likely to narrow, as the Reserve Bank of Australia is likely to raise interest rates for a third time this year.  A report overnight showed employment in Australia rose by twice as much as economists forecast.  We continue to look at Australia as one of the best currencies to own and suggest owners of the kiwi to take advantage of the recent strength to move their deposits into Aussie $.

Currencies today: A$ .758, kiwi .6402, C$ .8992, euro 1.2714, sterling 1.8706, Swiss .8039, ISK 71.57, rand 7.385, krone 6.47, SEK 7.33, forint 216.63, zloty 3.13, koruna 22.26, yen 116.37, baht 37.45, sing 1.5724, INR 46.23, China 7.9485, pesos 11.03, dollar index 85.69, Silver $12.27, and Gold… $612.03

That’s it for today…  While my day didn’t start out as planned, it looks like a beautiful morning.  Chuck will be back in the saddle on Monday, and I think he is staying for over a month this time!  I hope everyone has a great day (its always a great day at EverBank!!) and a terrific weekend.

Chris Gaffney
September 8, 2006

The Daily Reckoning