Introducing the New Pointless "Inflation Fighters!"

Good day... And a Marvelous Teusday to You!

Friday was not a good day for currencies. Once again the dollar took the hammer and swung a mighty swing. The euro spent the day in the 1.53 handle, as more and more talk about the Fed fighting inflation took hold of the markets.

I'm still resisting this rhetoric by the Fed. I can't help but believe that eventually the markets will realize the Fed is simply "talking the talk" and are unwilling to "walk the walk."


What the New "Inflation Fighters"
Would Do to the Economy

Some are saying the Fed could hike rates by 75 basis points. Just think of what 75 basis points would do to the economy. Or, the melting mortgage sector, or our deficit. How would that rate hike affect the bonds we have to issue? What would 75 BPS do to future interest payments on those bonds? None of these are good outcomes...

Yes, I believe the Fed needed to do something a long time ago to deal with inflation, but they turned their back on us. Now, suddenly they are "inflation fighters." That's like a fireman watching a house burn almost to the ground, before they try to put it out. That doesn't make any sense to me.

But, that's what the market is all about these days. The market wants the Fed to hike interest rates, and take away the positive interest rate differential of the euro and other currencies.

Friday also saw the stupid CPI (Consumer Price Index) consumer inflation data for May. The monthly number jumped form 0.2% to 0.6% and the annual number to 4.2% from 3.9%. Meanwhile the core number showed that the annual rate remained at 2.3%. But the core number doesn't count food and energy inflation, so that number is totally useless in times like these.

Normally, the media only highlights the "core" number. But when it plays into what the markets are thinking, the media switches gears and reports the "overall" number. That's just fine with me, but why change horses in the middle of the stream?

The U. of Michigan Consumer Confidence Index fell further in the first two weeks of June, from 59.8 to 56.7. Just to give you an idea of how far this index has fallen - the index averaged 85.6 in 2007. And the index of consumer expectations for six months from now fell from 51.1 to 49.

So current feelings are not great and neither are futures expectations...and the Fed is going to raise rates? I don't think so.

The Highest Eurozone Inflation in 16 Years

Right now, I'm seeing the euro rally a bit on news that inflation in the Eurozone reached 3.7% in May. That was more than forecasted (3.6%). It's also the highest level of inflation in the Eurozone since June 1992.

That was about the time I moved over to trade foreign bonds at the old Mark Twain Bank. So that's a long time ago! The reason the euro is rallying on this news is simple: The European Central Bank (ECB) all but told the markets they would raise rates at their July meeting. This data does everything but confirm the rate hike is a "done deal."

I personally don't like to see inflation that high. But the ECB did a good job of recognizing inflation and reacting accordingly months ago, while the Fed was concerning themselves with being a "White Knight," and ignoring inflation to fight other demons.


What Did (and Did NOT) Happen at the G-8 Meeting This Weekend

We also had a G-8 Meeting this weekend. It may have slipped right by you. Personally, I forgot all about it until I turned on the screens this morning.

The formal communiqué after the meeting didn't mention the dollar or exchange rates. There had been some thought in the markets that G-8 would "pile on" the "pro dollar" talk, but they didn't. That has caused some selling of dollars this morning.

The G-8 ministers did focus on rising inflation. And I don't know if you've seen the pictures of the flooding in Iowa, but it is similar to what we experienced here in St. Louis in 1993.

One thing I did hear this weekend was this little snippet. The Chairman of Nestle has declared that high food prices "are here to stay" as governments divert resources to make bio-fuels, amass stockpiles and limit exports. Doesn't that make you feel good about going to the grocery store this week? Does it?

Good Day Currency Traders!

The dollar drifted higher throughout most of the day yesterday as the markets prepared for the FOMC rate announcement.

The sentiment driving the dollar higher was the Fed would sound more hawkish in their rate announcement, to keep an overall consensus among the FOMC members. In other words, the big players in the market assumed Bernanke and his friends would at least sound tough on inflation to maintain the status quo.

Dollar bulls were also expecting a signal from Bernanke that a rate hike would be just around the corner. That belief alone encouraged currency traders to buy dollars and caused the dollar index to rise just under 74. That's the highest the dollar index has been in almost two months.

But of course, the Federal Reserve policymakers didn't deliver. Instead, the Fed composed a fairly neutral statement to deliver to the markets (just as I predicted on Monday).


All a Neutered Fed Can Do

The central bank left its benchmark rate at 2% and said "downside risks to growth remain." They also dropped in a reference from June's statement of "diminished" dangers.

The Fed also said price increases are of "significant concern." The statement indicates that the Fed realizes they have to leave interest rates at the current level until next year. The sluggish U.S. economy has taken away their best weapon against inflation, so they will just have to sit back and hope the credit crisis ends and inflation begins to ease.

Just after the announcement, traders sold off the dollar again (as I would expect). But then the strangest thing happened: The dollar regained its strength and finished the day with the dollar index closing in on 74 again. Overnight markets moved the dollar lower again, but Europe ran it back up.

With all of the negative data here in the U.S., and a slowing economy that has effectively neutered the Fed, I'm outright perplexed by this dollar strength!


The New White Knight for the Dollar?

From where I sit in the cheap seats, it sure looks like Europe is intervening.

Why else would the dollar continue to gain strength? Lower oil prices certainly have helped propel the dollar, but oil has actually moved up about US$1 in early European trading while the dollar continues to rally.

Yes, I know the Eurozone has been posting some pretty poor numbers lately.

Just this morning Germany reported that factory orders in the second quarter dropped for a seventh straight month in June.

The sky-high euro price has also caused manufacturing to slow in Germany and Europe because the stronger euro has weighed on demand for exports. The continued slowdown in German industrial production increases the likelihood that the Eurozone is slipping into a recession.

But the European Central Bank (ECB) has never wavered from their mandate for price stability. This dogged fight against inflation will help maintain the euro's long-term value. This latest dollar rally just doesn't make sense when you look at the overall global economic picture.

Yes, growth in the Eurozone is slowing, and Germany may be slipping awfully close to a recession, but the United States IS in a recession! And while the impotent Fed sits back and 'hopes' inflation will go away, the ECB has had the courage to continue its fight against inflation.

Just Because the Dollar Has Made a Comeback Does NOT Mean It's Healed

The past month has been hard on foreign currency holders, but investors have to look past this dollar correction.

Only three major currencies have outperformed the euro since the beginning of 2008: The Brazilian real, Mexican Peso, and Swiss Franc. In the long run, I have to believe the strong inflation-fighting ECB will help to maintain the euro's value vs. the U.S. dollar.

Today the markets will shift their attention to the upcoming Bank of England and ECB interest rate meetings.

ECB President Jean-Claude Trichet is expected to keep interest rates unchanged, but may signal higher interest rates will be needed to combat inflation. Trichet will hold a press conference after the ECB announces its decision tomorrow, at 1:45 pm in Frankfurt.

The currency markets will be hanging on his every word to try to figure out if there will be any change in his hawkish stance against inflation.

Until then, the dollar will likely remain in a fairly narrow trading band vs. the dollar. Stay tuned!

Good Day Currency Traders,

Sometimes predicting financial markets is a piece of cake.

Entire markets stretch out before you like a level playing field and anyone who's even the least bit market savvy can see where stocks, bonds and currencies are headed.

In those types of blessed markets, one plus one really equals two. A higher dollar equals lower commodity prices. A stronger U.S. dollar equals higher stock market prices all over the world.

Sometimes it's just that easy. Other times, it's not.

Take the current dollar rally. There are a myriad of "hidden" threats lurking that could derail its advance. The problem is there is money to be made on the strengthening greenback and investors realize it.

For example, an agitated client at our asset management firm just emailed me about the dollar. In his email, he demanded that I take advantage of this dollar rally. Of course, he could be right - assuming the rally lasts. Trouble is, no one knows if that's going to happen.

Right now, it's hard to say. You can't easily shrug off the long queues of angry people in front of collapsed banks or the protracted global recession. All those factors weigh on the dollar.

So beware of the notorious bear market rallies - including currencies.


After Nine Months, Has This Global Stock Bear Given Birth to a Higher Dollar?

Nine months of fierce bear market have pushed many stocks around the world down to attractive valuation levels again.

A firmer U.S. dollar could trigger an impressive bear market rally. In particular, we could see a rebound in financial stocks and shares of European exporters tied to the higher dollar going forward.

That leaves us to answer the crunch question: Where is the U.S. dollar heading?

From a technical point of view a spike in the U.S. dollar would not be a surprise. Since 2000/2001, the U.S. dollar/euro (USD/EUR) exchange rate has fallen 45%. This means the dollar fell an average of 8% each year.

The downtrend was only briefly interrupted by a 10% dollar rally in 2005. In other words, there wasn't a noteworthy correction for 2 ½ years - that is suspicious. This doesn't happen too often to exchange rates (at least going back as far as 1973).

The best argument for a temporarily firmer U.S. dollar is the prospect of a weaker euro. There's no longer any question of whether Europe can elude the U.S. recession.

Now the question is: How long and deep will this contraction be in Europe?


Trouble in the Eurozone Paradise

The news coming out of Europe has been darkening by the day.

Consumer sentiment in the main Eurozone nations has plunged - especially in Italy and Spain with never-before-seen numbers. Eurolands' service sector is stagnating. Sentiment among businesses in the German export machine is in a freefall. Growth in new orders has come to a halt.

In other words, it's just a matter of time until the European Central Bank (ECB) loses her anxiety about inflationary pressure and stops talking about hiking rates. This should shed a new light on the U.S. currency.

So yes, the dollar may be heading higher. But here's the thing: My preferred way of drawing profit from a continued rally is not buying U.S. dollar but rather, I'm buying the few currencies and stocks that will profit from this rally.

Profit from this Rally, Without Sticking Your Hand in the Fire

It looks like it's time for a portfolio shift. As always, I and my colleagues consider protecting your assets as a top priority in an environment of high uncertainty.

But you cannot help but have a second look at this bunch of stocks in Switzerland, the Eurozone, U.K. and even in Japan that currently trade at fire-sale prices (with a recession already priced in). All of these should do well once the U.S. dollar moves higher versus the major currencies.

How can you benefit from the current U.S. dollar strength? Our recipe is quite simple. For our clients, my colleagues and I are planning to buy Japanese yen and invest in a dozen carefully selected stocks.

Of course, it's impossible to know whether we get away from this recession and banking confusion with only a black eye or if we'll end up in a depression before this mess is through. (If it's the latter, 40% of stock values could disappear.)

Therefore a good deal of our company's portfolio will be allocated to short-term investment strategies. For instance, we're looking at top-rated short-term bonds in the euro, Swiss franc and a few selected high-yielding currencies such as the New Zealand dollar (NZD).

Bottom line: The U.S. has deeply rooted problems at the moment. The U.S. is facing high debt, a zero % savings rate and depleted balance sheets. I simply don't believe all that jazz will be whisked away overnight.

So my colleagues and I would rather invest in the currencies and stocks that will profit from any short-term dollar strength than the dollar itself

Good Day Currency Traders,

The U.S. dollar continued to hammer the currency markets on Friday. The dollar index climbed all the way back above 76, a level we haven't seen since mid February. The dollar did sell off a bit in early European trading this morning, but it has started to climb again as I write.

Right now, the dollar has no fundamental reason to be rallying right now. The reports and news out of the U.S. have not been favorable for the greenback. Also, the United States' twin deficits continue to soar out of control.

Last week, I mentioned that the recent dollar moves smacked of intervention. The dollar only seems to want to move in one direction - up. It looks like the dollar is ignoring the data that would typically send it back down. intervention (even cooperative central bank intervention) can only impact the markets for the short-term.

In the end, economic fundamentals will eventually win out, so the central banks have only bought themselves a little time. Unless the economic data in the U.S. does an about face (and I don't expect it to), the U.S. dollar will remain in its long-term downward trend.

On Friday, we all saw more U.S. data that in theory should have moved the dollar lower, but it seemed nothing could touch the dollar last week. U.S. non-farm productivity slowed, increasing at a 2.2% pace vs. last month's 2.6% rate. Unit labor costs came in just under expectations, and wholesale inventories rose by almost two times the expected rate.

This increase in wholesale inventories is somewhat telling. It means that companies could NOT sell all of the goods they produced. Could U.S. consumers finally be slowing their spending? If so, it would mean an even more dramatic drop in GDP for the last half of 2008.

Will the Dollar Be Able to Rally in the Face of More Bad News?

This week will bring a number of big economic reports here in the United States. And none of these are expected to be dollar friendly. Tomorrow we will get the Trade balance which is expected to have ballooned back above 60 billion in June. We will also see the monthly budget statement and ABC consumer confidence.

Wednesday will bring us the Import price index in the U.S. along with advance retail sales and business inventories. July Consumer Prices in the U.S. lead off the reports on Thursday, followed by the weekly jobless claims.

And we will close out the week with the empire manufacturing numbers, TIC flows, industrial production, and the capacity utilization numbers for July. If the reports come in as expected, the dollar bulls may start running for the hills.

This should be an interesting week. The data in the U.S. should NOT support the dollar, so we will see if the central banks want to fight the underlying economic fundamentals and continue to prop up the greenback.

I expect the dollar will lose much of its recent strength, but the last two weeks have proved me wrong. So, we'll have to wait and see what a little central bank intervention can do.

Hope everyone has a Marvelous Monday