US Dollar Rallies Briefly on News of Osama Bin Laden's Death

Welcome to May… Well… After almost 10 years of searching… US Special Forces found Osama Bin Laden in Pakistan, last night, and after refusing to surrender, he was killed… I would sing “Ding Dong the Witch is Dead”, but it’s more serious than that, folks… This man masterminded 9/11…

Yes, it’s difficult to believe, and at first I thought the news to be a hoax… But, it’s true, and the celebrating has begun, as I’m seeing celebrations going on in Times Square, and Ground Zero. Doesn’t it feel as though a shadow that’s been hanging over us like the Sword of Damocles, has been removed? Well, that’s how I feel this morning… Besides being completely burned out, and tired…

I see where the dollar rallied, briefly, after the news that OBL had been killed, but, as I look at the currencies right now, I see they are a mixed bag of good and bad performances versus the dollar this morning.

Did you see the price performance of gold on Friday? I was sitting at the EverBank table on Friday, talking to customers and prospective customers, and I had my Bloomberg anywhere going, and I had to stop the conversation at one point, and say… “Hey gold is up $32 today!” It was a major tail kicking by gold on the dollar, Friday… The weeklong negativity built up to a head of steam for the dollar on Friday, and it was no more evident that the dollar was going down from the fight, than in the price of gold…

A reader sent me a note last week, and said that instead of saying gold had hit an all-time high, I should say that the dollar reached a low… Makes sense, but, it’s a psychological thing… When you own something, you only care about how high it can get in value…

Gold and silver are seeing some profit taking this morning that has carried over from the Asian markets overnight. Gold is down $7, and silver is down $2.5 (but has been much lower overnight!)

The dollar negativity is also showing up in the dollar index, which fell another 1.5% last week, which puts the dollar index down 3.8% in April, and 7.8% year-to-date. One thing to keep in mind here, folks, is that the dollar index is about 3% above its all-time low that it reached in 2008 of 70.70… So, the way my mind works is that by seeing this, I figure the dollar will return to its all- time low…

Since the dollar index is heavily weighted with euros, it’s important to note that the euro (EUR) alone, is up 10.8% year-to-date, which is not too shabby for a currency that’s been pronounced dead by several writers, and they know who they are, at least three times now… I guess, if they just keep saying it, that eventually it might happen, and they can boast that they “called it”… HA!

This morning, Eurozone manufacturing showed a small increase in April, with the Index number rising from 61.7 to 62… But is still a bit below the post-financial meltdown high of 62.7, which was reached in February this year. I think the thing to point out here, and keep in the back of your head is that the euro has been gaining strength (recall above I said +10.8% this year), and manufacturing isn’t getting hurt… But, around 1.50 (the euro is 1.4845 this morning) I think the Germans will cringe… So, keep your eye on that, I know I will!

Here in the US our manufacturing pulse will also be measured this morning, with April’s ISM Index most likely showing a decline in the index number to 59.5 from 61.2… That’s the wrong way, folks… The wrong way… And I think it shows just how fragile the US economy is… Last week we saw first quarter GDP fall to 1.9%… I still believe that we have become addicted to the financial cocaine of stimulus… I also believe that consumers have “forgotten the pain”, as they are out spending more than they make again… And why not? If they overspend, and can’t make their mortgage payments, the government will make them for them! Or something like that!

And we’ll get another finger on the pulse of the economy this Friday when the May Jobs Jamboree prints… I’m telling you this now, so you can hear me later… May jobs are going to be disappointing…

This week, we’ll see a few central bank meetings around the world… The Bank of England (BOE), the European Central Bank (ECB), and the Reserve Bank of Australia (RBA) all will meet to discuss interest rates… I would have to think that there’s only an outside chance that the ECB would go two-for-two with rate hikes at meetings… The other two central banks are not on the rate hike docket this week. While I believe that the ECB is going to hike rates multiple times this year, I don’t think they will go two-for-two, for that would open Pandora’s Box of market perceptions that rate hikes will come at every meeting, and the ECB doesn’t want any part of that type of market perception.

Speaking of the ECB… ECB President, Trichet, is going to retire this year, and be replaced with Italy’s Central Bank Governor, Mario Draghi… I have to say that when Trichet, who was the head of France’s Central Bank, took over the reins of the ECB from Wim Duisenberg, in 2003, I was not a fan…not at all! How could France’s central banker carry on the discipline of providing price stability that Duisenberg had created? It was the Bank of France for crying out loud! But! I have been surprised, and pleasantly pleased by the performance of Trichet… So… I’ll keep that in mind when the Bank of Italy’s President takes the reins on the ECB this year… But seriously, do I think the Bank of Italy has someone that can carry on the price stability flag? No… So, here’s hoping that I’m surprised and pleasantly pleased once again!

Well… The Fed is on the docket to purchase $23 billion in Treasuries this week, as a part of their quantitative easing program. It’s all winding down folks, their QE2 that is… And like I’ve said a few times now… I don’t expect the Fed to admit or feel like they need to extend QE2 to QE3 right away… And that feeling in the markets could very well spring a dollar rally… But only until the markets begin to put pressure on the Fed to come back to the QE table for QE3, probably by the start of the fourth quarter, but could be later, as these are not easy people to move on an idea…

But… What if the negativity toward the dollar has reached a fever pitch by mid-June, and the announcement of QE2’s ending isn’t enough to turn the tables, and that dollar rally never comes to fruition? Well… Then the dollar’s in for a world of hurt! I can’t even imagine just how badly the dollar gets burned in the next few months, if no temporary rally comes about…

But… I’m still thinking that there will be a temporary dollar rally after the end of QE2…

Before I head to the Big Finish… I wanted to point out something that I saw this morning… Commodities have outperformed all other financial assets and the dollar for the fifth consecutive month! Commodities gained 4.4% in April, while the MSCI all-country World Index of Equities gained 3.9%… Bonds of all types returned 0.9%…and I told you above how badly the dollar performed in April!

It’s no shock to me that commodities have been the top-dog asset class for five consecutive months… Inflation pressures are rising all over the world, folks… Our central bank sees them only as “transitory”… The empirical evidence of inflation all around us, is as noticeable as a man with a hatchet in his forehead! But not to our Fed Heads… Don’t you wish you could “fire them”? The president can’t even fire them, for they are not a part of our government! Oh! You didn’t know that? You must be a new reader… Stay tuned for more info on that in future letters!

Then there was this… EverBank World Markets Clients will soon be receiving their monthly newsletter, the Review & Focus… In the letter I outline the data to explain why I believe the price of gold is manipulated… So… Look for that in your mailbox.

To recap… The world wakes up today to hear the news that Bin Laden has been killed by Special Forces in Pakistan. Besides that… The currencies and metals are drifting a bit this morning, after putting in strong performances on Friday. Gold was up $32 on Friday. German manufacturing remains resilient in the face of a stronger euro, while the US manufacturing train is running out of track. ECB, BOE and RBA meet this week, with only the ECB having an outside chance at a rate hike at this meeting.

Chuck Butler
for The Daily Reckoning

The Daily Reckoning