US Dollar: Don’t Trust This Rally

It is now confirmed that the US housing and labor market is in serious trouble. New home sales broke below the 500k make or break mark for the first time in 17 years. The last time we saw new home sales at these levels was during Bush Senior’s Administration. Jobless claims also climbed to 493k, the highest since 2001. To add salt to the wound, durable goods orders dropped 4.5 percent last month.

However these depression like numbers failed to put a dent into the US dollar as investors hold their breath for the approval of Paulson’s Troubled Asset Relief Program. With Congress going on recess at the end of next week, something needs to happen over the next few days. The euphoria in the markets could be short lived since the stock and currency markets have been very fickle.

Gold prices are higher and everyone is hungry for US Treasuries, driving the TED spread and the LIBOR/OIS spread near historic highs. This tells us one thing – which is that lending between banks have frozen and big investors are still risk averse. Therefore I would not trust the USD/JPY and carry trade rally.

Paulson’s Plan Could be a Lose-Lose for the US Dollar

Paulson’s plan is ultimately a lose-lose situation for the US dollar. If it is approved, it would cause a destruction of the US balance sheet by increasing the nation’s debt ceiling by 6.6 percent to $11.315 trillion. If it is not approved or if Paulson and Bernanke only get a trimmed down version of the plan, they would have to go back to the drawing board to come up with other solutions to unclog the mess. If we end up being between rescue plans, the uncertainty would weigh on the US dollar. Therefore I still believe that the US dollar could fall another 5 percent over the next few months.

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In the Financial Papers: Today’s Top Forex News 12.19.07

Here is the “In the Financial Papers Radio Broadcast” (Length: 7:00 minutes). The player should load automatically. Please let me know if you like it. Contact Kathy

In the Financial Papers:

 

Podcast Covers:
– Results of Fed’s Term Auction Facility
– Markets React to ECB’s $500 billion Loan
– Morgan Stanley has Wider than Expected Loss, China Will Invest $5 billion
– Foreclosures in US Increases 68%
– Fed’s Announces New Mortgage Rules, Greenspan Chimes In On What He Thinks
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In the Financial Papers: Today’s Top Forex News 12.04.07

Here is the “In the Financial Papers Radio Broadcast” (Length: 09:06 minutes). The player should load automatically. Please let me know if you like it. Contact Kathy

In the Financial Papers:

 

Podcast Covers:
– Verbal Intervention from Germany?
– Bank of Canada Lowers Interest Rates
– JPMorgan Downgrades Goldman, Morgan Stanley, Merrill and Lehman
– Goldman’s Cohen Sees S&P 500 Up 14% by End of 2008; `Recession Fears Fade’
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Higher LIBOR Rates Boost Fed Rate Cut Expectations

The big story of the day is the sharp rise in LIBOR rates. This morning the LIBOR rate in Euros increased to the highest level in 6 years while the rate in dollars increased to the highest since September 17. This has caused central banks around the world to offer additional “emergency funding.” Even the Bank of England who didn’t inject any additonal funds in August pledged to add liquidity. Year end funding issues could keep the market tight. If we do not see the rates come down, central banks may be forced to take actions that they would have otherwise avoided given the current inflationary pressures.

According to the futures market, traders are pricing a 100% chance for a quarter point cut (0% chance for unchanged rates) AND a 22% chance for a 50bp cut. This represents a sharp change from a day ago. For Jan, there is a 80 percent chance of at least another quarter point rate cut. See the table below for more details:

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