The Dollar Rallies!

Good day… And a Happy Friday to one and all! This weekend can’t get here fast enough for me. I’ve just been beat to all get-out this week, going home in the afternoon to sleep, waking up for a few hours, and then going right back to sleep at night. Much like last summer when I was recovering from those surgeries… Just a difficult week for yours truly.

It was made even more difficult with this dollar buying that’s going on, even if there isn’t any strong fundamental reason to do so! I’m still thinking that the Fed will cut 25 or maybe even 50 BPS next week. The markets seem to think that this will be the last rate cut by the Fed in this cycle, but I’m not in agreement with them on that. I still believe that rates will bottom out at 1.50%, which is 75 BPS from where we are now.

The dollar rallied most of the day yesterday but found a high late in the day and stopped rallying… But then in the overnight market, the dollar was bought again, with the dollar index rising to a one-month high – so it gained against all of the majors. We’ve seen this type of dollar frenzy before, but calmer heads have always come back to the table to point out the awful fundamentals that the dollar carries around like an albatross around its neck.

Last night was a holiday in Australia and New Zealand to celebrate ANZAC Day, which led to some of the dollar bull’s brashness. Without those two high yielders in play, the focus was on Japanese yen (JPY), and that didn’t prove to be good for yen, as the dollar pushed hard against yen, which then carried over to the euro (EUR), once London opened this morning.

Euros are more than 3 cents lower than there were on Tuesday. Shoot Rudy! Even the Chinese renminbi (CNY) has lost ground to the dollar this week, falling back to 7. I don’t think Mssrs. Schumer and Graham will like that!

The data in the U.S. yesterday wasn’t responsible for the dollar rally, as it once again just didn’t have the stuff that a strong currency can build on. March Durable Goods fell 0.3% (versus +0.1% forecast), but the previous month’s -1.7% decline was revised up to -0.9% – as if -0.9% is “good!” Durables weren’t exactly a great picture for the economy.

New home sales were atrocious, sinking 8.5% to a 17-year low in March. That’s absolutely crazy folks! And this guy, Richard Moody, chief economist for Mission Residential said, “There is little to support any claims that the housing market is stabilizing, let alone forming a bottom.”  That’s right! And it’s about time somebody besides me was banging this drum and trying to get the government’s attention on this! But hey! We’ve got Big Ben Bernanke with his “What me, worry?” look, telling us this housing meltdown bottomed last August.

With this dollar strength, the price of oil has come down a bit, as if $116 is anything to get excited about… However, it is better than the $119 it traded at earlier this week. Then I saw something on TV last night that made me sit up and take notes. (And believe me that rarely happens.) There was an oil analyst talking, and when it got down to the cheese that binds, he blamed the high price of oil on the dollar debasement… WOW! Finally! Somebody besides me, talking about dollar debasing!

Here’s the thing that made me sit up and take notes… The price of oil when measured in dollars is up 319% in the past couple of years… But, against the euro it is only up 92%… (OK, 92% is a lot, I’m not sweeping that under the rug.) The point here is that look at the difference!

There are a lot of directions I can take here… Like… So much for those that keep spouting off that deficits don’t matter… Well… If we didn’t have the monstrous deficit that we do have, that requires over $2 billion per day in foreign investment to finance it, we wouldn’t have to allow this debasement to happen. OK, follow me on this…

As I’ve explained before, the deficit has to be financed… Either now or later, print money, bonds to sell, whatever, it HAS to be financed. The United States has had difficulty attracting enough foreign investment to finance the deficit in the past year… So… They could either raise interest rates aggressively to attract foreign investment, risking bringing the economy to a screeching halt, or… Allow a debasement of the currency, which would allow the foreigners to buy U.S. assets at a discount.

This debasement has been going on for six years now. It started slowly, gained momentum in 2004, only to see a dollar rally (because of props to slow the decline) in 2005, then the debasement picked up again in 2006 and 2007, and the first quarter of 2008. So… If you want to blame somebody or something for this mess… Blame the debasement of the dollar, which is needed because DEFICITS DO MATTER!

Whew! I’m tired after writing that; you should have seen my fat fingers flying (how about that alliteration?) across the keyboard! I was loaded for bear with that one!

So… Where do we go from here? Well… I for one, believe we’ll see this dollar rally last until the Fed meets next week. Once the markets get a strong dose of “Chuck was right” and the Fed cuts rates, the dollar rally will end. At least that’s how I see if from the cheap seats!

Today… We only get to see the color of the latest U. of Michigan Confidence report for the second half of April. You may recall that earlier this month this confidence index fell to 63.2, which was a low last seen in 1982… This second half of the month report is expected to remain at that low… I would think it would show more weakness, but then the stock market has recovered a bit in the past two weeks.

Bill Bonner here at The Daily Reckoning yesterday, called this “Noisy Markets” and that description fits what’s going on right not very nicely!

Yesterday, I talked about the rationing going on with rice… A reader in Kuwait, (yes, I have a reader or two in Kuwait, in fact I have readers all over the world!) sent me a note to tell me that “in Kuwait you can’t buy Indian rice for love nor money because India has put a total ban on all rice exports!! This happened in early April.”

But yesterday, we saw a story on the telly that said that there was no shortage of rice in the United States and that it was simply media hype… Hmmm, those are the same people that tell us that deficits don’t matter, and that we have little or no inflation too!

So… We’ll end the week with a dollar rally going on, and that doesn’t get me upset. What upsets me is the reason the dollar is rallying… The thought that the Fed has sounded the “all clear” horn, and that the awful fundamentals are not something to be concerned with… Simply, wrong… At least that’s the way I see it… I could be wrong..

Don’t you just love the fact that I have to explain that stuff about me possibly being wrong? The legal beagles are all over me like a cheap suit these days, and so… I play the game. When I retire, I’m going to write a letter (that people will have to pay for) and not hold back any punches… Imagine that letter! Beware dolts and idiots of the world, you will be called out! But, that’s not happening for a few years… God willing.

Standing in the shadows of the dollar love, waiting for the heartaches to come… (When it reverses of course!)

Currencies today 4/25/08: A$ .9335, kiwi .7825, C$ .9830, euro 1.5605, sterling 1.9850, Swiss .9635, ISK 73.70, rand 7.66, krone 5.1440, SEK 5.9805, forint 162.10, zloty 2.20, koruna 16.18, yen 104.30, baht 31.70, sing 1.3635, HKD 7.7940, INR 40.11, China 7.00, pesos 10.44, BRL 1.6750, dollar index 72.74, Oil $116, Silver $16.68, and Gold… 886.47

That’s it for today… I have to say “thank you” to all the people that went to the St. Pete Times article about me earlier this week, and submitted comments about the article. They were all very kind words, and they are truly appreciated! My little buddy, Alex, has his first baseball game tonight – That is if it doesn’t rain, which it is expected to do. UGH! They replaced the road into my little river town that was washed away by the floods… It has been a tough spring! The NFL Draft is tomorrow… Our Rams were so awful last year, that they get the second pick. I hope they don’t “blow it”! And… I hope you have a Fantastico Friday, and Wonderful Weekend!

Chuck Butler
April 25, 2008