Problems For The Dollar Index

The dollar index, which is heavily weighted with euros (EUR), is sinking fast. How fast is it sinking? Well, yesterday, even with the brief dollar rally in the early morning, the dollar index was unable to climb back to an 80 level, which is significant enough, but the other thing that happened once the dollar rally was over, was that the dollar index saw it’s 55-day moving average fall through it’s 200-day moving average… For all you chartists out there, that’s HUGE, right? Yes… It is… So, yesterday when I sent the note to Chris and Frank, the dollar index was hanging onto 79… This morning it is 78.82… The low this year was 76.60 back in January, before all the Eurozone GIIPS began to show rot on their vines.

For those of you keeping score at home, the dollar index reached a high of 88.71 back in June… So… Like I said the other day, the move in the currencies is very strong since June, and this dollar index data proves that!

OK… What caused the turn-around has quite a few opinions going around… But what I can tell you for sure, is that the recent run on the dollar has been the FOMC meeting, and the dance around the fact that they are planning to implement more quantitative easing (QE)…

When a central bank goes down the road of QE, they might as well just come out and devalue their currency too, because the QE is the sharpest knife in the currency debasement drawer. And… It’s what a central bank does when they’ve cut their interest rates to the bone, and have no other arrows in their quiver.

And then yesterday with all the dollar-selling going on… The US saw consumer confidence this month fall more than expected… Which, all I’ll say, is “it’s about time!” The Consumer Confidence Index fell from 53.2 to 48.5… A 4.7-point drop in one month, which saw a deterioration of both the “present situation” and “expectations” components of the index.

And I keep hearing people who should know better say things like “the economy is recovering” and “we’ll not see a double dip”… Well, to the second part of that statement, they’ll be technically correct… What? Yes… You see, once the group of people that decides when recessions start and end decided that this recession ended in “June of 2009”, that meant that if the US goes into a recession again, it will not be considered a “double dip” because too much time has passed. It’s all just grasping at straws, folks… Double dip, large scoop, whatever… It’s not good, and the sooner the government admits it, and gets out of the way, the sooner we can get on with recovering!

The Asian and Pan-Asian currencies are in rally mode this morning, after China printed a stronger-than-expected manufacturing report… Here’s the skinny… China’s Manufacturing PMI (index, that’s reported the same as ours), rose to 52.9, from 51.9 last month, which is the strongest monthly print since May…

Speaking of China… I should note that I’ve read a lot about this row they are having with Japan right now… China has flexed their muscles, and Japan is eating spinach, in an attempt to match muscle strength… And now China has blocked the exports of rare earth minerals – metals that are a collection of 17 chemical elements – to Japan…

Anyway… This saber rattling between China and Japan is not a good thing, folks, and let’s hope that it’s just a tempest in a teapot.

The euro traded to 1.3625 last night, then saw selling that took it down to 1.3580, where it was when I turned on the currency screens, but now has rallied back above 1.36 again… The euro got a bump when consumer confidence in the Eurozone printed firmer than expected, on the rising exports.

Speaking of consumer confidence, Sweden printed a confidence report last night that showed consumer confidence rising to its highest level in over 10 years!!!!!! Yes, that note got 6 exclamation points because 10 years is long time! Sweden also saw their manufacturing confidence print at a multi-year high… So… It shall be that the Swedish krona (SEK) was the best performer overnight!

In recent times, whenever I speak, I get a few people that tell me diversifying with currencies is a waste of time because it’s just a race to the bottom by all countries with their currencies… But, I point out that while I don’t believe that wholeheartedly, if it does happen, the US is leading the race… In fact, they’re already running ahead of the crowd, which will mean that the currencies hold an “edge” over the dollar in a race to the bottom, because the dollar will be the winner, winner, chicken dinner!

OK… In defense of my statement that I do not believe that “wholeheartedly”… The Aussie dollar (AUD) is within 1 1/2-cents of its all-time high, which it reached in July of 2008… So… I guess the Aussie dollar is not participating in the race, eh? The only race the Aussie dollar is in, is the one to the top!

Speaking of the top… The Swiss franc (CHF) continues to move higher past parity with the dollar, and is now $1.02… In 1971, when the dollar was bounced from the Bretton Woods Agreement, because Richard Nixon had closed the gold window because of too much deficit spending, which at that time was nothing compared to the deficit spending going on now, you could get over four Swiss francs for $1… Today? You can’t even get 1 franc with a dollar!

And while we’re talking about being on top… How about gold and silver? Apparently, $1,300 and $21 respectively for gold and silver are not scaring away investors, because the prices are still rising. Remember, just last week silver reached $21 and that was “cause to celebrate”? Well… Don’t look now, but silver has $22 in its sights, which seems pretty fast considering how long it took for silver to reach $21… But for people like me, who have held silver since the early ’80 s… It hasn’t been fast enough!

I’m really on board the “silver bullet,” and no I’m not talking about Coors Light! I’m talking about silver as an investment, and the prospects of the shiny metal to continue to move higher… You see, $1,300 for gold pretty much prices “Joe six-pack” from the market… But… Even at $21, silver is within reach… Think about that for a minute…

The data cupboard here in the US has been emptied out, and the markets will have to depend on other things to drive them once Europe closes down.

Then there was this… Household incomes plunged for the second year in a row in 2009, as fewer families earned over $100,000 a year while the ranks of the poor rose, according to census statistics released Tuesday. News that US households are spending less and saving more, ultimately reducing their debt, might appear to be an uplifting scenario. In reality, many of those households are defaulting on their debt, not tightening their belts. Capital Economics Group reported that almost half of a $77 billion decline in total household debt during the second quarter was because of bank charge-offs of credit card debt, residential mortgages and other consumer loans.

Hmmm… Doesn’t sound like the correct medicine for a recovery, but then, I look at things logically, and not through rose-colored glasses like the media and government…

To recap… A brief sell-off in the currencies overnight didn’t last long, as Eurozone Consumer Confidence was stronger than expected, and boosted the euro back over 1.36 this morning. The Aussie dollar is closing in on its all-time high, and the Swiss franc just keeps adding on to its “already higher than parity to the dollar” figure. The dollar index’s 55-day moving average fell through the 200-day moving average, thus pointing to potential further gains for the currencies. The data cupboard is empty today.

Chuck Butler
for The Daily Reckoning

The Daily Reckoning