Dollar traders on edge as they suspect Fed is wrong

[FRED]

Dollar traders on edge as they suspect Fed is wrong
December 4, 2006 (Financial Times)

Currency markets will open on edge on Monday after last week's sharp decline in the dollar, with traders looking to new economic data and the tone from the European Central Bank for fresh reasons to trade on the dollar.

The latest bout of dollar weakness has occurred as currency markets have developed a growing belief that the US economy is in worse shape than the Federal Reserve claims. They have also been encouraged to buy the euro by the lack of concern expressed so far by ECB officials about the rise of the single currency.

On a trade-weighted basis, the dollar has declined nearly 4 per cent since the middle of October, with more than half that fall being recorded since November 20.

AntiSpin: The dollar had been beaten up before, only to come off the ropes swinging. But there's something distinctly different about this particular period of dollar bashing, the difference between disliking GW Bush in 2005 and disliking him in 2006; recently negative opinion on the dollar has become socially acceptable to speak aloud, and the effect is self-reinforcing. This is as it should be, as a Chief Executive is ultimately responsible for a national currency's value.

From "The Late, Great American Dollar" first published on the AlwaysOn Network August 30, 2004, quoting James Sinclair of JS Mineset, a unit of a nation's currency–or group of nations' currency, as in the case of the euro–is as a share in company's stock. It is valued by:

• The reputation and financial acumen of management. This is expressed in a currency by the actions of the central bank, the quality and actions of the people in charge of the treasury, and the financial direction given by the country's political administration. This has a bottom line in the position of the federal budget in terms of the flow towards deficit or surplus.
• Earnings, which are expressed in the Balance of Trade in terms of its deficit or surplus position.
• The amount of shares outstanding, which in a currency is expressed by the Current Account of the country in question and its deficit or surplus position.
• The "dividend" rate, which expresses itself in a currency in terms of the interest rate paid on six month money. Simply stated, if the interest rate paid on six month money exceeds the anticipated six month inflation rate, the impact is positive.

As goes the president, so goes the currency. They are inexorably linked.

One can also argue that the public group fretting about the dollar, as taken seriously by currency traders, was correlated to the change to a Democratic Party Congress, and the markets are worried about "the financial direction given by the country's political administration." Can it possibly get worse?

We've just learned that The Sovereign Society has a seminar coming up this Friday to address recent moves in the dollar:

Why the Breakdown in the U.S. Dollar is for Real and How to Protect Your Portfolio

Your U.S. dollars are worth much less than they were last week. Join Sovereign Society Currency Director, Jack Crooks for an emergency teleconference/interactive webinar on Friday, December 8th at 4:00pm EST to discuss this breakdown, and learn how to ride the dollar decline to profits:

Teleconference Topics Include:

• Reasons for the Breakdown? Discover the economic fundamentals and technical analysis behind the breakdown.
• Forecast? Learn Jack's six-month targets for the major currencies.
• Three Ways to Play the Falling Dollar: Profit from Jack's top three currency choices to play now.

[DanielLCharts]

Re: Dollar traders on edge as they suspect Fed is wrong

perfect time to go long the dollar. sentiment is overwhelmingly bearish.

[BK]

Re: Dollar traders- Blame lies with 'We The People'

The Administration is giving the people what they want....the latest voting results indicate that the Voters may be waking up that Inflation is a Big negative in their lives and the bleief that Iraq is a mess. Ironically many of the most anit-war areas (like Boston - Raytheon) have economies that benefited from War related spending.

This Republican Administration is doing what a Democratic Administration keep the Cash flowing - keep employment up - and let the Tax Payers ignore the problems - because Tax Payers don't re-elect Politicians that insist that we experience a painful recession today to avoid bigger problems later. Tax Payers want their Free Lunch - and they don't worry about who will go without because of their Free Lunch.

In Roman times I think it was referred to as 'Bread and Circus' -

The 1990s allowed everyone to get Fat and Happy. The Democrats wanted as many Home owners as possible (just like the Republicans). Perpetuating the myth that Homeowner ship was the only way to wealth for the Regular folk. Imagine the lack of enthusiasm for a Politician running on a Platform of Citizens who "live within their means".

I'm an independent voter and laying this mess at the feet of President George Bush and the Republican Party - is an overly simplistic view of a Problem that has been growing since the 'New Deal'. I would agree that its a bigger mess because of the last 4-5 years.

But, look at your local Government and you'll see the same tactics that the Feds are using - Cities and Towns have loaded up on debt in the last 5 years and spending has increased at break neck speeds. Why is over borrowing and over spending happening - thats what the Voters want!

[jk]

Re: Dollar traders on edge as they suspect Fed is wrong

perfect time to go long the dollar. sentiment is overwhelmingly bearish.

i am largely out of the dollar, but i worry that it's a crowded trade.
so: what would lift the dollar?
i sure don't see the fed raising rates anytime soon.
i suppose a stronger economy than expected would give support.
any other nominees?
deflation would do it.

[akrowne]

Re: Dollar traders on edge as they suspect Fed is wrong

so: what would lift the dollar?
i sure don't see the fed raising rates anytime soon.
i suppose a stronger economy than expected would give support.
any other nominees?
deflation would do it.

Not so fast! Deflation driven by asset bubble collapse would drive foreigners out of the US financial markets, which would sink the value of the dollar on the exchange.

The only scenario I can envision where the dollar fights back from it's major pair of down-plateaus of this year is one where foreigners for some reason buy an unusually high level of US financial assets, possibly with the express intent of supporting the dollar. But it will be difficult to do more than simply manage to tread water.

The overarching fact is this: every major historical period of rapid debt accumulation (typically related to war or defense) has been followed by an inflationary+recessionary period. What makes anyone think we'll avoid it this time?

The parallels to the Vietnam era are striking: not only did war costs finally come home to roost, but the outcome of that conflict caused global support for the US to deteriorate, making it difficult to finance the US's "ongoing operations".

So I know which way things are going to go in the medium-to-long term: short-term trade at your own risk.

[DanielLCharts]

Re: Dollar traders on edge as they suspect Fed is wrong

i am largely out of the dollar, but i worry that it's a crowded trade.
so: what would lift the dollar?
i sure don't see the fed raising rates anytime soon.
i suppose a stronger economy than expected would give support.
any other nominees?
deflation would do it.

Reduction of consumption growth. The problem I see with EJ's reasoning is that it doesn't allow for this variable. His argument is that foreign lenders aren't going to continue lending us money. That makes sense. At some point the lending becomes too much of a burden on their economies. Yet the growth of the consumption component of our GDP is largely tied to MEW, which right now is largely tied to housing prices. If housing doesn't go up, I doubt consumption will continue to grow, and I think the burden of financing our consumption will not be as great for the foreign lenders. Second, the GDP of the emerging economies is very much tied to investment, and if the US hits a recession, there is a very good chance that that component of their GDP starts to slow at a fast clip. If that happens, it's not unimaginable that people won't want to be holding their currencies. As I understand it, EJ's reason for dismissing American's cutting back on consumption is that it's culturally improbable. I have my doubts.

You can guess that I'm not sold on gold at all right now. Gold, oil and real estate are traditionally the best inflation plays, and as our CPI continues to slow dramatically there is a good chance that all three take a hit. If you throw housing into CPI measures then CPI is falling off a cliff.

For the past 25 years, the real (inflation adjusted) price of gold has been highly correlated with the reciprocal of mortgage affordability. I doubt this trend is going to change so that suddenly we see housing prices as quantified by the affordibility of mortgage payments become more affordable and gold less so. Not with housing prices sliding as they are.

[jk]

Re: Dollar traders on edge as they suspect Fed is wrong

Reduction of consumption growth. The problem I see with EJ's reasoning is that it doesn't allow for this variable. His argument is that foreign lenders aren't going to continue lending us money. That makes sense. At some point the lending becomes too much of a burden on their economies. Yet the growth of the consumption component of our GDP is largely tied to MEW, which right now is largely tied to housing prices. If housing doesn't go up, I doubt consumption will continue to grow, and I think the burden of financing our consumption will not be as great for the foreign lenders. Second, the GDP of the emerging economies is very much tied to investment, and if the US hits a recession, there is a very good chance that that component of their GDP starts to slow at a fast clip. If that happens, it's not unimaginable that people won't want to be holding their currencies. As I understand it, EJ's reason for dismissing American's cutting back on consumption is that it's culturally improbable. I have my doubts.

a recession would cut consumption. that would reduce imports as well. since a lot of the investment in emerging markets is to ramp up export production, that investment would slow. in a global slowdown there could be a flight to "safety," and that might still be the u.s. dollar.

You can guess that I'm not sold on gold at all right now. Gold, oil and real estate are traditionally the best inflation plays, and as our CPI continues to slow dramatically there is a good chance that all three take a hit. If you throw housing into CPI measures then CPI is falling off a cliff.

a recession would hit oil and real estate, but it's not clear what would happen to gold. i think the expectation would be that the fed would cut and monetize to whatever extent required to push up growth, so gold might hold up or even rise on that expectation.

[0tr]

Re: Dollar traders on edge as they suspect Fed is wrong

Another important aspect of share value is shareholder concern (by management for shareholders). Although there are difficulties measuring this, evidence of abuse of shareholder concern is a kiss of death. In the context of currencies this poses other questions.

As for currencies, current positioning by commerical traders is no longer in strong support of the euro. Sloppy positioning, could go anywhere(cftc.gov has positions of traders.)

The Canadian dollar looks like a much better buy, looking at commercial trader positioning vs small and large speculators.

The Aussie dollar and the British pound are not in good shape (by trader positioning). The positioning of small and large speculators are excessively long, at extremes, opposite the commercial traders. Small and large speculators are typically on the losing end (but not always).

[DanielLCharts]

Re: Dollar traders on edge as they suspect Fed is wrong

a recession would cut consumption. that would reduce imports as well. since a lot of the investment in emerging markets is to ramp up export production, that investment would slow. in a global slowdown there could be a flight to "safety," and that might still be the u.s. dollar.



a recession would hit oil and real estate, but it's not clear what would happen to gold. i think the expectation would be that the fed would cut and monetize to whatever extent required to push up growth, so gold might hold up or even rise on that expectation.

If a recession hits and there is a global slowdown that causes a flight to safety and reduces inflation, i doubt gold is where anyone wants to be (unless they like losses).

[DanielLCharts]

Re: Dollar traders on edge as they suspect Fed is wrong

Another important aspect of share value is shareholder concern (by management for shareholders). Although there are difficulties measuring this, evidence of abuse of shareholder concern is a kiss of death. In the context of currencies this poses other questions.

As for currencies, current positioning by commerical traders is no longer in strong support of the euro. Sloppy positioning, could go anywhere(cftc.gov has positions of traders.)

The Canadian dollar looks like a much better buy, looking at commercial trader positioning vs small and large speculators.

The Aussie dollar and the British pound are not in good shape (by trader positioning). The positioning of small and large speculators are excessively long, at extremes, opposite the commercial traders. Small and large speculators are typically on the losing end (but not always).

agreed, nor are they particularly favorable for gold, and they are certainly not favorable for silver, which i view as a proxy for speculative PM investors right now. caution warranted on the short dollar long gold trade.

[0tr]

Re: Dollar traders on edge as they suspect Fed is wrong

One interesting thing that did/does come out of the COT (commitments of traders) was a new record for commercial traders in various index futures. Before Thanks Giving, commercial traders were >48 billion short, while small speculators were ~25 billion long. These sorts of numbers are very strong cautionary indicators for the intermediate term (days/weeks to months) Commercial traders have backed off a bit, but still very strong, >40 billion short, higher than previous market tops. Sooner or later it all gets real.

[jk]

Re: Dollar traders on edge as they suspect Fed is wrong

for those who want to follow the cot reports, you might want to check out:

http://www.buythebottom.com/

[DanielLCharts]

Re: Dollar traders on edge as they suspect Fed is wrong

One interesting thing that did/does come out of the COT (commitments of traders) was a new record for commercial traders in various index futures. Before Thanks Giving, commercial traders were >48 billion short, while small speculators were ~25 billion long. These sorts of numbers are very strong cautionary indicators for the intermediate term (days/weeks to months) Commercial traders have backed off a bit, but still very strong, >40 billion short, higher than previous market tops. Sooner or later it all gets real.

yes. now look at the quarter to quarter correlations over the last two years beteen 1) sp 500 2) hui 3) emergin markets. that's why i'm suspicious of gold doing well. perhaps it does well and the market does well. perhaps the correlations end. who knows.

[spunky]

Re: Dollar traders on edge as they suspect Fed is wrong

Mr Charts :


:confused: I bought alot of physcial silver this summer at spot 10.50- sold at 13.60 please explain to me how this is bad ? Buy silver in the summer ,sell in the winter.


I am fairly newbie in PM's and a small timer , but for the life of me I cant figure out why everyone continues to relate Gold to the bonar. The Gold, crude oil , bonar relationship is changing before our eyes. Exactly how I dont really know ,but it is changing. JMHO

[Jim Nickerson]

Re: Dollar traders on edge as they suspect Fed is wrong

PETER BRIMELOW 12/04/06
Dessauer doubts dollar
Commentary: But veteran newsletter editor's concern only short-term

Dessauer's conclusion: "Here is what I expect: Interest rates in Britain and the euro region will be raised. In the short run, currency markets are all about interest rate returns. Therefore, as interest rates rise in Europe, I expect a near-term decline in the U.S. dollar. Higher European interest rates will make the euro more attractive."

But, Dessauer emphasizes, this is simply a short-run thing: "DO NOT FALL PREY TO THE PESSIMISTS' SCARY DOLLAR BASHING ... The more you know about other countries, from Europe to China, the better the U.S. looks. For (the pessimists') gloomy scenario to come true, foreign investors would have to find an alternative to the U.S. dollar. Some day, that might happen. But that will take many years. Meanwhile, a slightly lower dollar will be good for the U.S. trade deficit and hard on Europe's exports."

In other words, Dessauer is cautious dollar-wise in the very short and (presumably) very long term. But not the medium term.
I am still uneasy about Dessauer's rationale. Look at this: "There will be renewed talk about China selling its huge dollar hoard. But that is nonsense. China is 'diversifying,' but it is not selling dollars. China is buying higher-yielding dollar-denominated investments and cutting back on buying U.S. Treasury obligations. It is not in China's interests to see the dollar plunge! That would damage China's trillion dollars of reserves and cause enormous problems for China's trade."