Jawboning the Dollar Higher

Good day… And a Thundering Thursday to you! Well… The markets are still “hooked” and flailing about in the water over the Big Ben comments Tuesday, which were then followed up on Wednesday. What did he say this time? We’ll get to that in a minute.

But, first… Front and center this morning, we need to talk about the dollar strength that is prevalent in the currency markets right now. This all started a couple of weeks ago after the euro (EUR) hit 1.60. OK, too far too fast, right? And after an initial weakening to 1.54, the single unit recovered and all was right on the night again as it approached 1.58. Then the Big Ben Bomb…

The euro is the Big Dog of currencies, so you can use it as a proxy for the rest of the currencies. Sure, there are times that other currencies outperform the euro, but they didn’t do it alone. It takes the size and offset to the dollar capabilities of the euro to get the ball rolling. I talk to a lot of people that still don’t believe the euro is a viable currency. Well, it is. It’s here to stay… No matter what the pundits will tell you about Italy and Spain. As I’ve aid at least a dozen times, Italy and Spain should be thanking their lucky stars every night that they were asked to join the euro!

OK… So, dollar buying is on the agenda these days. Let’s just go with that, and then talk about how that might continue. Well… More jawboning by the Fed would help… So would Fed rate hikes… But come on, do you really believe the Fed is going to raise rates now, or in the near future with the economy teetering on the edge of a deep dark recession? Not a snowball’s chance in you know where! So, that leaves us with jawboning, because the economy isn’t going to be a reason for people to buy dollars… And the jawboning is where we circle back to Big Ben.

Yesterday, Big Ben was talking about inflation, and how it was too high… Oh my gosh! Isn’t this what I’ve been screaming at the walls about? Anyway, folks… That’s jawboning the dollar higher, because the markets read any talk about high inflation as a wink and nod that interest rates are going higher. Well, that may be the case in countries that have central banks that really care about fighting inflation… But that’s not the case here! This central bank has no intention on fighting inflation. They look at inflation and thank their lucky stars that it’s not deflation! Big Ben is just jawboning.

And in my opinion, and that of one of my fave economics professors, Big Ben is doing all this jawboning in an attempt to lower oil prices. He has nothing else to work with here to accomplish lower oil prices, so let’s jawbone the dollar!

It’s working, Ben… The dollar is stronger, and oil prices are weaker. But, there’s a fly in the ointment here, Big Ben. Oil prices may be weaker, but gas prices aren’t budging! That’s right; gas prices aren’t budging. Uh-Oh… You forgot about that part didn’t you, Big Ben?

So… I have to follow up on the rant I gave yesterday regarding Big Ben, at this point. So again, if you don’t want anything to do with my soapbox antics, just skip ahead to the section marked “***”.

OK… After my rant yesterday, I came to a couple of conclusions (with the help of readers!) First of all… Tell me, dear reader, wasn’t Big Ben the guy who talked about the Fed having a printing press to print as many dollars as needed to avoid deflation? And wasn’t he the one that talked about throwing those printed dollars out of a helicopter? (Thus his nickname: Helicopter Ben) Now, I know that my college economics classes are not nearly on par with those at Princeton, but come on, you mean to tell me he didn’t think that printing all those dollars was going to cause inflation? I learned that in Econ 101! At Meramec Community College!

And then there’s this, and I’ll leave it alone (I promise!)… With the markets believing that his comment means the Fed will intervene in the currency markets, I think this leaves him exposed. What if the markets decide to test Big Ben’s will, and he doesn’t have the arrows in his quiver to back up the threat of intervention? Uh-Oh! And I don’t believe he has a “war chest” to defend the dollar, like the Bank of Japan has to defend the yen… Or sell it, like they did in 2003.


Unfortunately… Right now, all the momentum – along with the investors jumping off the bandwagon of the weak dollar trend – has the dollar in favor. Look… If the dollar had the fundamentals to back this up, I would be telling you so… But it doesn’t!

And the economy isn’t going to shine for the dollar either! Look… The economy has survived the past few years on consumer spending… But where is the consumer going to get money to spend now? The dotcom busted… The House ATM busted… The housing market busted… And now credit cards are maxed-out.

The Big Boss, Frank Trotter, and I were talking yesterday, trying to come up with something that would keep the consumer spending. We’ve gone through all that above… We’ve put two people to work in households… We’ve maxed-out hours worked… The gains from the technology phenomenon have hit the ceiling… It’s been a tough row to hoe folks… But you would think that it’s all seashells and balloons! And that’s exactly what the government wants you to think. Everything is beautiful in its own way, like a starry summer night, or a snow covered winter’s day.

Two recent surveys tell a lot about the U.S. consumer. One says that 9 out of 10 Americans are making lifestyle changes to cope with rising energy costs… And 4 out of 10 Americans are considering moving closer to their place of work.

Oh, United Airlines is cutting up to 1,600 jobs and cutting flights… But don’t look for those 1,600 job losses to show up in the Bureau of Labor Statistics Jobs Jamboree. They’ll just create some ghost jobs and everything will be beautiful, in its own way.

OK… The Bank of England (BOE) and European Central Bank (ECB) are meeting as I pound away at the keys. I don’t expect a move from either of these two central banks, but what I am looking for is some strong Hawkish statements from ECB President, Trichet… Let’s see if he can jawbone the euro back up.

The Reserve Bank of New Zealand (RBNZ) met last night, and left rates unchanged. Unfortunately for kiwi (NZD), RBNZ Governor Bollard had some damaging words in the press conference afterward. Bollard mentioned that the RBNZ would entertain a rate cut this year. That news hit kiwi hard, and before anyone had a chance to bail, kiwi was off 1%, and not looking very good.

This is a 180-degree change for Bollard and the RBNZ, and the news hit a nerve. I have to say that I’m surprised, given the fact that inflation in New Zealand is above the ceiling target by quite a bit. Inflation is running over 4% and is expected to peak at 4.7% in the third quarter of this year. What I think Bollard is counting on here is lower oil prices… But I think he’s barking up the wrong tree here, folks. Oil prices might be weaker right now, but how many times have we seen oil prices back off in the past couple of years, only to come back stronger and reach higher levels before backing off again? Quite a few, is the answer… And I suspect, that’s what we’ll see this time too!

So… Not even the high yielders are shielded from this dollar rally, which has just brought euros to a level below 1.54… Aussie dollars (AUD) have held 95-cents, but barely…

The Canadian dollar/loonie (CAD), which I talked about, being so tied to oil prices, has fallen to 98-cents after spending much of the past couple of weeks at parity with the green/peachback.

OK… Before I head to the Big Finish, I have to tell you that my friend, Bill Bonner, had a great piece here in The Daily Reckoning yesterday… He imagined getting a phone call from Big Ben, who was seeking help and answers. This totally cracked me up… I wanted to highlight the end of the call, which after all the talk, the two (Bill and Big Ben) came to the conclusion that there was nothing Big Ben could do… Here’s the end of the call…

Bill to Big Ben… “Then get out while the getting is good. Maybe you could fake a heart attack or something, and announce your retirement…that would give you some public sympathy…while you leave the next guy holding the bag.”

Currencies today 6/5/08: A$ .9525, kiwi .7645, C$ .9835, euro 1.54, sterling 1.9475, Swiss .9525, ISK 77.25, rand 7.8320, krone 5.1775, SEK 6.05, forint 157.25, zloty 2.1950, koruna 15.98, yen 106.10, baht 32.98, sing 1.37, HKD 7.8080, INR 42.91, China 6.9460, pesos 10.31, BRL 1.6285, dollar index 73.76, Oil $122.50, Silver $16.68, and Gold… $872.25

That’s it for today… We’re back to a full desk today, as our “marathon man” Chris Gaffney returns, after running a sub four-hour marathon in San Diego.  2 RBI’s in an 8-6 win for my little buddy, Alex, last night… I’ve had some “bad days” the last couple of days… It’s been two weeks since my last treatment, and I still feel like I was the one that ran the marathon! (I don’t like to drive my car that far, much less ever think about running that far! HA!) I’ve been good though, heading home each day early to get my feet up and rest… It helps! The Detroit Red Wings win the Stanley Cup… That’s a bitter pill to swallow for us Blues fans… Time to hit the send button; I hope your Thursday is Thundering!

Chuck Butler
May 5, 2008

The Daily Reckoning