We’re Calling Your “Strong Dollar” Bluff Trichet

Euro Impasse: ECB Stands Divided on What to Try Next


Recall, yesterday I told you how European Central Bank (ECB) minister Axel Weber, confused the markets with a statement that left the traders scratching their collective heads.

Well, friday morning, ECB President Trichet failed to calm the markets, and their fears of a split in the ECB’s governing body is weighing heavily on the euro.

Trichet has got to get these split factions of the ECB together...

In one corner, we have Weber, who does NOT want to see interest rates fall below 1%, and does NOT want Quantitative Easing.

In another corner, we have the Greek contingent that wants to see deeper rate cuts, and Quantitative Easing if needed.

And then finally we have Austria's Nowotny, who agrees with Weber on the rate cuts, but believes that Quantitative Easing makes sense.

If Trichet can't get these factions to come together, then the euro is going to get bogged down in all this mess, because nothing will get done.

Trichet tried to put on the "company face" and tell reporters in Tokyo this morning, that "we have a very united Governing Council." But he must not have been convincing enough.

So, with the Big Dog euro weighed down, the rest of the little dogs have to remain on the porch. That means dollar strength folks...

Shoot Rudy, even the Japanese yen lost ground last night, reversing what had been the trend for the week, with the high yielders backing down, and yen ratcheting up. But not last night and this morning.

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Now Serving a Round of Dollar Strength…

Looks like Trichet walked into the saloon, and told the bartender to serve a round of dollar strength! I say this because Trichet told reporters in Tokyo..., "Saying the euro was weak would not reflect the current situation," and he, "agrees with the U.S. strong dollar policy."

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Hmmm... That’s the first time I've ever heard an ECB President talk about a strong dollar policy. He must have something up his sleeve, or perhaps he drank the kool-aid that the U.S. is serving.

Here’s what I think: Trichet is just trying to keep the euro from exploding higher here. All the talk on the street these days is that the U.S. will have no other choice but to continue to debase the dollar to finance debts.

Now, Trichet can't have the euro, which is the offset currency to the dollar, going off on a rampage from people selling dollars right now! If Trichet were to say what he really feels, he would say, "The euro is strong, and will remain strong as the dollar retreats."

But a politically inspired euro surge against the dollar would deepen the Eurozone recession, and most likely really spike the already sensitive feelings among some members about the strong euro. In short, I think Trichet is playing his card here. So far, the markets are "all-in" with that card.

Now, if I were some BIG TIME market mover, the markets would read this and call Trichet's bluff. But, I'm not... So we have to deal with euro weakness for now.

“Lehman Really Was Too Big to Fail” – Fellow Fed Head Criticizes Bernanke’s Policy

Okay, let’s move on. The dollar is stronger this morning, so let's take a look at just why that is...

Well, it couldn't be the data that printed this week. That's not the stuff a strong currency is made of, for sure. Yesterday, for instance... Realty Trac issued a report that painted a really sad picture, folks.

Let's take a look... In the month of March we saw a record level of foreclosure activity. The number of households that filed for foreclosure was more than 12% higher than the next highest month on record.

San Fran Fed Head, Janet Yellen, was in the news last night. She came out and said that "allowing Lehman Bros to fail was a mistake." She went on to say, "Lehman Bros was too big to fail and its bankruptcy caused a quantum jump in the magnitude of the financial crisis."

Hmmm... I wonder what her boss, Big Ben Bernanke will have to say about this statement. Now, that would be really something to see. Can you imagine watching the Fed Heads air their dirty laundry with Big Ben? Talk about causing problems! It will be interesting to see how this coming clean for Yellen plays out.

The Treasury Bubble Is Back…Courtesy of China
There was a great story on the U.K. Telegraph the yesterday [You must be registered and logged in to see this link.] by Ambrose Evans-Pritchard, regarding China and gold. Here's a snippet of the story...

“Nobu Su, head of Taiwan's TMT group, which ships commodities to China, said Beijing is trying to extricate itself from dollar dependency as fast as it can."

"China has woken up. The West is a black hole with all this money being printed. The Chinese are buying raw materials because it is a much better way to use their US$1.9 trillion of reserves. They get 10 times the impact, and can cover their infrastructure for 50 years."

Now, that's interesting! The article goes on to suggest that the Chinese are buying up metals (specifically copper) with their reserves so that they don't have to continue to push their currency higher vs. the dollar.

I've said for some time now that Treasuries are a bubble. And that bubble was probably about ready to pop, when the Fed announced that they would be buying Treasuries. But, that just prolongs the inevitable in my opinion. And now, if this continues, the Chinese could be backing away from the Treasury auctions.

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That means I'm back on the Treasury bubble popping wagon. The Fed may have kept the bubble floating for six months to a year, but haven't we learned with past bubbles, the longer you keep them floating, the bigger they get, and the nastier the mess is when they pop!

Okay, before I head to the Big Finish I wanted to share with you something Tim Smith thought of yesterday... Capacity Utilization was so bad, that maybe we could shorten it to CAPUT!