The US Dollar Pushes Back

Recall on Friday, I said that the non-dollar currencies would probably just follow whatever the stocks did, since the data cupboard was empty? Well, the non-dollar currencies didn’t even follow that theme, as stocks pretty much wallowed around in the mud all day. The dollar began to push back at the gains the other currencies had made during the week… And overnight, the dollar has continued pushing back.

And… I don’t really have a problem with that, as long as it remains short-lived, for the non-dollar currencies had really moved higher without any pushback from the dollar. I love it when the markets create dips, so that the investors who can’t make up their minds can finally get in!

The BIG NEWS this week surrounds the 2-day FOMC meeting that begins tomorrow. Long-time readers know that I’ve always wondered why the heck the Fed Heads need 2 days to flip a coin and decide whether to raise rates or cut them (HA!)… In fact, I’ve always contended that the Fed Heads sit around and play board games.

Seriously though, the markets are of the belief that the Fed will keep rates near zero, but will announce that they will begin to remove stimulus, as Fed Head Honcho, Big Ben Bernanke, believes the recession is over.

I think this is wishful thinking on the markets’ part, as I really don’t see the Fed Heads doing anything but talking about doing this. You see, the Fed Heads know all too well that the commercial real estate problems are just beginning and with unemployment near 10%, to remove stimulus now could be disastrous.

In addition to the 2-day FOMC meeting, we will also see the treasury auction off $112 billion of 2, 5, and 7-year Treasury Notes, which just happens to be a record amount for that combination of notes… The previous record was $109 billion about a month ago.

So… Here’s what I see going on here… The Treasury sees that $109 billion was taken up a month ago (remember, this is the one that the Fed bought back a few billion from primary dealers), and just like a baseball pitcher that gets a strike called for him on the outside of the plate, he’ll just throw it a couple of inches further outside, and see if the umpire will call that a strike too… The Treasury is simply pushing the strike zone… What’s another $3 billion? “The foreigners will take them” you can hear the Treasury dudes saying… Hmmm… When do you think foreigners will simply say “no mas”? I really don’t think the Treasury dudes, or the current administration believes that will or can happen, so why not continue to push the deficit higher and higher? That’s what those dudes are saying, folks… Not me!

The other big thing going on this week is a G-20 meeting in Pittsburgh that begins Friday (I think!) When a French official that was going to attend the G-20 meeting was asked about what would be talked about, he said that currencies would NOT be on the agenda.

I guess that’s because Brazil, Russia, India and China aren’t going to be there! For I believe if they were… Currencies – specifically the dollar – would be at the center of a heated discussion!

You know the G-20 members have far more “important” things to talk about, like how bankers get paid! Mental giants all of them!

On Wednesday, when the Fed Heads finally get around to putting their board games away, and give their statement and rate announcement, Norway’s Central Bank, the Norges Bank will also be making a rate announcement… And for my money, I’d rather hear what the Norges Bank has to say, for they won’t be speaking out of the side of their collective mouths… I do expect the Norges Bank to leave rates unchanged, but look for them to give some indication of when they expect to begin their rate hike cycle. I’m sure they have to keep as much cold water on their statement as possible, as to not get the markets all lathered up too soon.

Most of Asia is on holiday, today, and the currency guys took that opportunity to sell yen (JPY), bringing it back to 92 and change, which is where yen was before the big move in the currencies last Tuesday/Wednesday… As I said above, this is welcome, as it keeps the non-dollar currencies from going too far, too fast… I truly do not believe this is a short-term strong dollar trend, but a mini-correction, if you will.

In New Zealand, the country will print their second quarter GDP tomorrow… The forecast is for a drop in economic growth, which would not allow the Reserve Bank of New Zealand (RBNZ) the opportunity to follow Australia’s lead, when Australia gets around to hiking rates before the end of this year… And that, will allow the Australian dollar (AUD) to outperform kiwi (NZD)… At least, that’s how I see it!

Kiwi is already feeling the heat, dropping 1/2-cent overnight…

In Germany this week, we’ll see this month’s business sentiment as measured by the think tank IFO on Wednesday… Business sentiment is expected to reach a high since September of last year. That should help underpin the euro (EUR).

Gold and silver have also backed off their highs of last Tuesday/Wednesday. Gold is hanging by the skin of its teeth to $1,000 as I write, but I doubt it will be able to hold on, as of right now, it just appears that risk taking has waned a bit with the FOMC coming.

Remember though… I said a couple of weeks ago that I might have to raise the bar with gold… Remember how I used to give you the wink and nod whenever gold would fall below $900? I said that I might have to change that to whenever gold falls below $1,000.

The data cupboard has a few items this week worthy of our viewing… Like today, we’ll see the latest leading Indicators, which I think will be good short-term… But long-term would show some cracks in the economic growth foundation. Then we don’t really see anything with the FOMC going on Tuesday and Wednesday, till Thursday, when existing home sales print… So, we might as well wait until later in the week, to talk about the Friday stuff!

And then there was this… Over in Germany, campaigning for the election of Chancellor is going on… And the opposition has proposed a tax increase for the wealthiest, and a value added tax. The current chancellor, Angela Merkel, saw that and proposed a “tax cut”! Talk about a great campaign move! Even if she never cuts taxes in her next term, this is a great campaign move.

So… To recap… The dollar has pushed back versus the other currencies, but doesn’t appear to be taking any step toward a new short-term strong dollar trend. The FOMC meets this week, along with Norway’s Norges Bank, and G-20 later in the week. Gold and silver have also backed off their highs from last week, as risk taking has waned.

The Daily Reckoning