Good day… Chuck had a rough night, so he decided to stay home and try to get some rest. The Pfennig will be pretty short this morning, as I want to try and get it out as close to the regular time as possible. The currency markets were fairly calm yesterday, with the dollar staying in a pretty tight range before rallying some in early trading this morning.

The Euro has lost some ground in European trading as German business and consumer confidence fell more than economists forecast. The Ifo institute’s business climate index dropped to a three year low in July and consumer sentiment slumped to the lowest level in five years. Some currency traders pointed to these latest reports as further proof Europe is slipping into recession and that the ECB will need to cut rates before year end. It is obvious by now that the economies of Europe are weakening, and growth will not be able to match last years numbers. But I still believe Trichet and the other voting members of the ECB will continue their hawkish bias, and I don’t expect any interest rate moves until sometime next year. This should keep the Euro from falling dramatically away from these current levels.

One advantage of writing this so late in the morning, is that I can report on the numbers which came in today. We are expecting a plethora of data today, and have already received the CaseShiller Home price index which continued to drop. But the rate of the fall in US home prices has slowed, giving some economists reason to say the worst is over in the housing crisis. But other economists are warning investors not to read too much into the slowing of the decline in prices. The National Association of Realtors said yesterday that the median price of an existing home fell 7.1% in July from a year earlier, compared with a 6.1% drop in June.

We will continue to receive data on the housing market later this morning, as we will get July’s New Home sales, House Price index, and the 2nd QTR Housr price purchase index released in about a half hour. None of these numbers are expected to show a rebound in the housing sector, but the markets just want to see the numbers do better than the horrible expectations. Again, even if the numbers come in better than expected, they will almost certainly show the housing market is going to continue to slide.

Later this afternoon the FOMC will release the minutes of their August 5 meeting. It will be interesting to read just how fractured the FOMC is with regard to the trade off between fighting inflation and trying to stimulate growth. Bernanke has done an excellent job so far of keeping the members in line with most of them singing from the same song sheet. The recent drop in commodity prices should make Big Ben’s job a little easier, as it will calm some of the inflation fears. I still question just how long the drop in commodities will continue. China and the other emerging economies continue to grow at near double digit rates, which will likely continue to put upward pressure on the price of raw materials. I don’t think inflation is whipped, but is just taking a breather.

Oil prices erased an earlier loss and increased, bringing the Canadian dollar up also. The Canadian dollar was the best performing currency yesterday, strengthening vs. all of the most actively trading currencies. Commodities account for more than half of Canada’s export revenue, so the recovery in oil helped it rally.

Two other commodity based currencies didn’t fare as well, as both the NZD and AUD dollars declined for a second day. The Australian dollar slid toward a four-month low and New Zealand’s currency fell to its lowest in more than a week on speculation investors will continue to reverse carry trades. The overriding fear in the markets right now is that both the AUD and NZD central banks are going to cut rates, making the currencies much less attractive for investors who purchased them for the high yields. Many Asian investors have used these currencies to earn higher yields than what is available in their home currencies, but currency traders now worry that these ‘carry trade’ investors will be exiting these investments as the central banks of NZD and AUD cut rates. The New Zealand central bank has already started down the ‘rate cut’ path, and most believe the RBA will be cutting rates by 1/4 point at their meeting on September 2. If commodity prices continue to fall and the RBA does cut rates, the Aussie dollar will remain under short term selling pressure.

US labor secretary Elaine Chao said the Bush administration will keep pressing China to let the Renminbi strengthen at a faster pace to help close the US trade deficit. The Renminbi has moved up 6.7% this year against the US$ and has appreciated almost 21 percent since the end of its dollar peg in 2005. But recently the Chinese have slowed the Renminbi’s appreciation, letting it slide .4% against the dollar since Chinese leaders stressed on July 25 that maintaining steady growth is as important as combating inflation. US Treasury Secretary Hank Paulson said last week that US lawmaker’s proposals to punish China for depressing the value of its currency might spark an unproductive ‘trade war’. Growth will be slowing in China, but I still think they will be able to maintain a growth rate just under double digits. This rate will be high enough to continue China to allow a slow and steady appreciation of its currency. We have been saying all along that this currency will be a slow and steady performer, and not to expect any quick or dramatic moves. I continue to believe this is the path the Chinese will take.

Like I said at the beginning, this is a short one today. It is getting pretty late and I know many of you like to enjoy their Pfennig with their morning cup of coffee, so I’ll end it here and move on to the currency round up.

Currencies today 8/26/08: A$ .8540, kiwi .6935, C$ .9535, euro 1.4634, sterling 1.8373, Swiss .90670, ISK 83.34, rand 7.8118, krone 5.4086, SEK 6.4087, forint 161.45, zloty 2.2737, koruna 16.76, yen 109.65, baht 34.22, sing 1.4226, HKD 7.8077, INR 43.85, China 6.8510, pesos 10.17, BRL 1.6390, dollar index 77.335, Oil $114.60, Silver $13.32, and Gold… $813.03

That’s it for today… Sorry for the late delivery, but better late than never! Hopefully a little rest will get Chuck back on track, this last round of medicine has been tough on him. Cardinals have an opportunity to charge back into the playoff race tonight, as they take on the Brewers who are just ahead of us in the wild card race. Hope everyone has a Terrific Tuesday!!

Chris Gaffney, CFA
Vice President
EverBank World Markets
1-800-926-4922
1-314-647-3837
www.everbank.com

Source: Dollar Range Bound…

Good day… And a Thundering Thursday to you! Well… The markets are still “hooked” and flailing about in the water over the Big Ben comments Tuesday, which were then followed up on Wednesday. What did he say this time? We’ll get to that in a minute.

But, first… Front and center this morning, we need to talk about the dollar strength that is prevalent in the currency markets right now. This all started a couple of weeks ago after the euro (EUR) hit 1.60. OK, too far too fast, right? And after an initial weakening to 1.54, the single unit recovered and all was right on the night again as it approached 1.58. Then the Big Ben Bomb…

The euro is the Big Dog of currencies, so you can use it as a proxy for the rest of the currencies. Sure, there are times that other currencies outperform the euro, but they didn’t do it alone. It takes the size and offset to the dollar capabilities of the euro to get the ball rolling. I talk to a lot of people that still don’t believe the euro is a viable currency. Well, it is. It’s here to stay… No matter what the pundits will tell you about Italy and Spain. As I’ve aid at least a dozen times, Italy and Spain should be thanking their lucky stars every night that they were asked to join the euro!

OK… So, dollar buying is on the agenda these days. Let’s just go with that, and then talk about how that might continue. Well… More jawboning by the Fed would help… So would Fed rate hikes… But come on, do you really believe the Fed is going to raise rates now, or in the near future with the economy teetering on the edge of a deep dark recession? Not a snowball’s chance in you know where! So, that leaves us with jawboning, because the economy isn’t going to be a reason for people to buy dollars… And the jawboning is where we circle back to Big Ben.

Yesterday, Big Ben was talking about inflation, and how it was too high… Oh my gosh! Isn’t this what I’ve been screaming at the walls about? Anyway, folks… That’s jawboning the dollar higher, because the markets read any talk about high inflation as a wink and nod that interest rates are going higher. Well, that may be the case in countries that have central banks that really care about fighting inflation… But that’s not the case here! This central bank has no intention on fighting inflation. They look at inflation and thank their lucky stars that it’s not deflation! Big Ben is just jawboning.

And in my opinion, and that of one of my fave economics professors, Big Ben is doing all this jawboning in an attempt to lower oil prices. He has nothing else to work with here to accomplish lower oil prices, so let’s jawbone the dollar!

It’s working, Ben… The dollar is stronger, and oil prices are weaker. But, there’s a fly in the ointment here, Big Ben. Oil prices may be weaker, but gas prices aren’t budging! That’s right; gas prices aren’t budging. Uh-Oh… You forgot about that part didn’t you, Big Ben?

So… I have to follow up on the rant I gave yesterday regarding Big Ben, at this point. So again, if you don’t want anything to do with my soapbox antics, just skip ahead to the section marked “***”.

OK… After my rant yesterday, I came to a couple of conclusions (with the help of readers!) First of all… Tell me, dear reader, wasn’t Big Ben the guy who talked about the Fed having a printing press to print as many dollars as needed to avoid deflation? And wasn’t he the one that talked about throwing those printed dollars out of a helicopter? (Thus his nickname: Helicopter Ben) Now, I know that my college economics classes are not nearly on par with those at Princeton, but come on, you mean to tell me he didn’t think that printing all those dollars was going to cause inflation? I learned that in Econ 101! At Meramec Community College!

And then there’s this, and I’ll leave it alone (I promise!)… With the markets believing that his comment means the Fed will intervene in the currency markets, I think this leaves him exposed. What if the markets decide to test Big Ben’s will, and he doesn’t have the arrows in his quiver to back up the threat of intervention? Uh-Oh! And I don’t believe he has a “war chest” to defend the dollar, like the Bank of Japan has to defend the yen… Or sell it, like they did in 2003.

***

Unfortunately… Right now, all the momentum – along with the investors jumping off the bandwagon of the weak dollar trend – has the dollar in favor. Look… If the dollar had the fundamentals to back this up, I would be telling you so… But it doesn’t!

And the economy isn’t going to shine for the dollar either! Look… The economy has survived the past few years on consumer spending… But where is the consumer going to get money to spend now? The dotcom busted… The House ATM busted… The housing market busted… And now credit cards are maxed-out.

The Big Boss, Frank Trotter, and I were talking yesterday, trying to come up with something that would keep the consumer spending. We’ve gone through all that above… We’ve put two people to work in households… We’ve maxed-out hours worked… The gains from the technology phenomenon have hit the ceiling… It’s been a tough row to hoe folks… But you would think that it’s all seashells and balloons! And that’s exactly what the government wants you to think. Everything is beautiful in its own way, like a starry summer night, or a snow covered winter’s day.

Two recent surveys tell a lot about the U.S. consumer. One says that 9 out of 10 Americans are making lifestyle changes to cope with rising energy costs… And 4 out of 10 Americans are considering moving closer to their place of work.

Oh, United Airlines is cutting up to 1,600 jobs and cutting flights… But don’t look for those 1,600 job losses to show up in the Bureau of Labor Statistics Jobs Jamboree. They’ll just create some ghost jobs and everything will be beautiful, in its own way.

OK… The Bank of England (BOE) and European Central Bank (ECB) are meeting as I pound away at the keys. I don’t expect a move from either of these two central banks, but what I am looking for is some strong Hawkish statements from ECB President, Trichet… Let’s see if he can jawbone the euro back up.

The Reserve Bank of New Zealand (RBNZ) met last night, and left rates unchanged. Unfortunately for kiwi (NZD), RBNZ Governor Bollard had some damaging words in the press conference afterward. Bollard mentioned that the RBNZ would entertain a rate cut this year. That news hit kiwi hard, and before anyone had a chance to bail, kiwi was off 1%, and not looking very good.

Good day… And a Marvelous Monday to you! And welcome to June! Hey! June is busting out all over, all over the meadow and the field… Buds are busting out of bushes and the rompin’ river pushes every little wheel that wheels beside the mill! (And you thought I was just a rocker!) We are having network problems this morning, as some heavy storms ripped through St. Louis on Saturday night. So, the Techie people need to come in and get stuff re-booted, etc. This may go out late… And it may not… At this point, I at least have my laptop working!

Well… Friday saw little movement in the currencies… As I signed off I had told you that maybe someone had said “enough” with the euro (EUR) selling… As the day went on, it certainly looked like that had happened, given the euro’s rise to 1.5550, after looking up to 1.55 early in the morning.

There’s been a return to risk aversion overnight, as some news from the United Kingdom has reignited the fears that the banks may still be sitting on a ton of bad debt… Of course, as Pfennig readers, you already know this, as I’ve told you over and over again there are many more “risk events” for the markets to digest.

Here’s the skinny on the U.K. news… The United Kingdom’s largest lender of buy-to-let mortgages, Bradford & Bingley, came forward to reveal that they had booked a pre-tax net loss of 8 million pounds (after accounting for reductions in the value of its structured investment assets. They also announced that they were going to restructure, and that TPG, Inc. would invest about 179 million pounds.

Well… There you have it… More melting of the U.K. mortgage meltdown… But, hear me now and listen to me later, this isn’t isolated to the United Kingdom.

This is a Big Central Bank meeting week around the world, with the Reserve Bank of Australia (RBA) meeting Tuesday, the Reserve Bank of New Zealand (RBNZ) meeting Wednesday, the Bank of England (BOE) and European Central Bank (ECB) meeting on Thursday. I don’t expect any of these to move rates one way or another at this time. There’s a tiny light shining on the RBA to raise rates, but I think that will come at a later date.

As always, with an unchanged rate environment, the press conference following the meetings will be the more important of the events. I expect the RBA, and ECB to remain hawkish with their intentions to fight inflation, while the BOE and RBNZ are grasping at straws.

The ECB has to deal with the fastest inflation in its 10-year history… That’s not a good thing folks… Not for a Central Bank, whose mandate is to provide price stability. The economy may be cooling, which I’ll talk about in a minute, but inflation is rising – which means rates remain at current levels, or may even go higher as the summer days get hotter.

With the return to risk aversion overnight, the Japanese yen (JPY) has rebounded along with Swiss francs (CHF). It will be interesting to see if the risk aversion can set its teeth into all the “euphoria” surrounding the U.S. markets these days.

The Eurozone economy seems to be slowing down, which shouldn’t come as a surprise. I’ve said all along to expect a slowing of the economy… But not a complete shut-down/recession, and this “slowing” might just be what’s weighing on the euro these days. There’s an important thing to remember about the euro… It’s the “offset” currency to the dollar. So… Look at the two currencies… The dollar, with all the awful fundamentals, a recession, low yields, a war, etc. and then the euro, with a slowing economy… Eventually, the markets will return to the underlying trend.

But first, we might have to endure some euro weakness. But, remember, the dollar has all the bad fundamentals… Sort of like a gauntlet to get through… And while it’s getting beaten, the offset currency is likely to be in favor.

OK… A reader sent me a note about the one-year auction of Treasury Bills, and said, “This is scary isn’t it?” OK… Here’s the skinny on that… You see U.S. Treasury Secretary Paulson is feeling like he’s been “through the desert on a horse with no name” these days. The Treasury is going to issue one-year T-Bills tomorrow for the first time since 2001. With the expanding budget deficit, they have no other choice. The cheese that binds here is the fact that Paulson is indicating that the Fed Reserve, who in the past, had been a regular purchaser of the debt, may not be willing to do so… You see, the Fed is focusing on taking on all that bad debt from mortgage lenders… (Can you say, “The Fed’s focus is all screwed up?”… I knew you could!)

Want some proof that our deficit situation has become completely out of control… How about this little ditty… In the first five months of 2008, the Treasury sold $1.4 trillion of bills, an increase of 36% from the same period last year. Oh, but don’t let that get in the dollar bulls’ way of buying dollars! Deficits don’t matter, right? HOGWASH! You and I know that! But these guys running the country don’t believe it… And that’s a real shame, or sham… Pick one, either one applies!

OK… I have to spend a minute talking about the announced investigation of the CFTC (Commodities Futures). A lot of people believe the investigation will reveal some bad stuff being done to push up the price of oil… Now, I’m not going to sit here and pretend to believe there’s nothing to that… But come on! If the authorities really thought they were going to find something noteworthy, do you think they would announce to the public they were going to investigate? Wouldn’t you want to sneak around and zip the lips until you had the thieves?

I think that this has more “calm the nerves of the public” to it, than it has “to catch a thief”. I mean, come one, we don’t build refineries; we don’t drill where we KNOW there is oil; we haven’t done a darn thing about alternative fuel, despite knowing that we’ve needed to do something since 1973; and we drive gas guzzling cars… But wouldn’t it be better to “blame” someone else for the fact that gas is $4 a gallon? Let’s go after the commodities guys… There’s got to be something there!

It’s supply and demand folks… We have two large countries with billions of people that now demand oil that never really had a demand before… China and India… Take that supply and demand, and mix in a falling dollar, and you have high oil prices.

OK… Today, the data cupboard will show us the color of the ISM Manufacturing Index. You may recall this index has been holding out below the line in the sand of 50, which indicates contraction or expansion, for the past four months. The experts believe the index will have inched up to 48.5 in May – still below 50 – and that should weigh on the dollar a bit today.

We’ll have some other minor reports as the week goes on, leading into the Friday Jobs Jamboree… But I’ll talk more about the Jobs Jamboree as we get nearer to Friday.

The Aussie dollar (AUD), which has been the belle of the ball lately, showed some pimples this morning, after a report showed that retail sales in Australia had unexpectedly declined. I wouldn’t let my shorts get all bunched up over this. As I always say… One swallow does not make a summer… And this is the first “soft” economic report we’ve seen from the land down under. I don’t think we’ll see the RBA back off the rate hikes either!

Currencies today 6/2/08: A$ .9555, kiwi .7850, C$ 1.0045, euro 1.5550, sterling 1.9625, Swiss .96, ISK 75, rand 7.7175, krone 5.12, SEK 6.0175, forint 155.33, zloty 2.1750, koruna 16.15, yen 104.90, baht 32.58, sing 1.3630, HKD 7.8040, INR 42.35, China 6.9325, pesos 10.33, BRL 1.6240, dollar index 72.97, Oil $125.81, Silver $16.86, and Gold… $892.10

That’s it for today… My long time friend and colleague, Chris Gaffney, traveled to San Diego with his lovely family this past weekend to run in a marathon there. I marvel at his determination to do these marathons. Yesterday was darling daughter Dawn’s husband, Jerry’s birthday. We all celebrated at little buddy Alex’s baseball game! Alex just finished four games in five days… That’s crazy! Congratulations to Alex, as he just finished 6th grade! School’s out for Summer! School’s out for ever! OK, enough Alice Cooper for a Monday morning! Kristin’s back from Cancun today! It will be interesting to get her take of the conference! OK… Enough! Time to go! I hope you have a Marvelous Monday!

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Source: Reigniting Fears

Good day… And a Wonderful Wednesday to you! We received more rain yesterday, and the spotting of a twister less than five miles from our office! I’m beginning to feel as though we should be gathering up the animals in twos. The old saying, “right as rain” is losing favor on the list of things I say!

Yesterday, I left you with the thought that the London traders had been buying dollars since they arrived back from their three-day Holiday weekend. The U.S. traders did the same… And I believe profit taking was the order of the day. Unfortunately though, it left the euro (EUR) down one-cent on the day.

The data for the U.S. yesterday wasn’t anything that would lead one to buy dollars, but that’s the game that people play now, every night and every day now… So, let’s go to the tape on the data and be finished with that!

First off, the Case/Shiller Home Prices data showed more rot on the housing vine, as their 20-city home price index fell 14.4%y/y in March – a new record low in data back to 2001. Las Vegas led the way (-25.9%), with Miami a close second (-24.6%).

You can’t tell me the housing meltdown has “bottomed” – not with data like this! And… You can’t tell me that consumers are not being just beaten around the head and shoulders daily with gas prices, food prices, falling house prices, and debt up to their eyeballs!

Speaking of consumer debt… I’ll bet a dollar to a Krispy Kreme that the next big shoe to drop will be the “maxed out” credit cards that consumers have been busy running up, since their “ATM” (house) has closed. I’m not wishing this to come true, folks… I’m simply talking about what I see happening. Sure hope I’m wrong about that one, because credit card debt is the absolute worst thing to have hanging over your head!

OK… Down from the soapbox, and back to the data… The U.S. Conference Board’s consumer confidence fell more than expected in May from 62.8 to 57.2. This is a new low for the data since October 1992, and a depth surpassed only during and just after the depths of recessions since 1970. Need more data that spells “recession”?

Speaking of a recession… A reader sent me a note yesterday saying he was surprised that I didn’t mention that George Soros and Warren Buffett were both “Pfennig readers”, since both were quoted in Europe Saturday as saying that the United States is in a recession, and both said it will be long and deep.

Alrighty then! Hey! My friends down under sent me a note that said they fully expect the Reserve Bank of Australia (RBA) to increase interest rates 50 BPS before year-end. That’s two 25’s… With the first coming in August. Basically, I agree totally, and think these rate hikes will grease the tracks to parity for the Aussie dollar (AUD).

The news didn’t help the Aussie dollar yesterday though, as it looks as though the selling of the Big Dog (euro) affected all the little dogs, even down under!

I’m going to step up on the soapbox again here folks… So if you don’t want to subject yourself to more “Chuck’s views” then skip ahead. OK… If you’re reading this, then that means you’re ready… So, here goes… I was reading stories on the Internet last night and seeing how bloggers and writers are ripping the oil companies. Hmmmm… I guess the “rippers” don’t realize that the guys that head the oil companies don’t own them! The oil companies are owned by pension funds – you, me, and the guy down the street that cuts his grass with his shirt off! We even had some dolt representative from California mention “nationalization” for the oil companies. Of course, she called it “socialism”… Doltness showing there, folks… I shake my head in disbelief.

OK, I’m back now… I have more to say on the subject, but I had better stop there!

In the overnight markets of Asia and London, we haven’t really seen much movement to follow on yesterday’s selling, which is why I believe it was profit taking. Most of the “Big Boys” were out on Friday and Monday… So when they came back and saw the levels, they said, “By Joe, let’s take a profit or two”!

The only currency to see more slippage was the Japanese yen (JPY), with a little slippage from Swiss francs (CHF), as stocks were back en vogue yesterday, and thus the carry trades were back at work.

And the yen’s losses weren’t just against the dollar. Yen is losing lots of ground to the euro again. The losses to the euro had stopped for a while, but they are back!

So… The bad earnings reports of the past 10 days are swept under the rug, eh? Let’s go buy stocks again, the coast is clear! UGH!

Gold saw an end to its rally yesterday too, with a $14 sell off… UGH! The gold sell off also coincided with a big drop in oil price the past few days. Of course, the oil price sell off is the only “welcome” price drop! Oil has dropped from $135 last week to $127 this week… I guess maybe someone in the oil biz got the memo that U.S. drivers are putting the brakes on and not driving so much. Who can? Not with gas prices around $4!

OK, I know that those that own Prius cars can, but you are a very low minority of drivers…

In Germany this morning, we’ve seen some data that should keep rates right where they are if not eventually push them higher. I’m talking about inflation data. Five of the six German regions have reported higher inflation this morning – which points to an increase of 0.06% month-on-month. The consensus was for an increase of 0.04%, so this upside surprise reverses the sharp fall we saw in April. I knew that the April number was questionable.

Norway’s Norges Bank is expected to leave rates unchanged this morning… However, with oil prices being what they are, I expect the Norges Bank to revisit the rate hike table this summer… And that thought should underpin the krone (NOK).

Fed Head Fisher, one of the two dissenting votes of the last rate cut, will speak today. He will speak on “inflation and debt”. This ought to be interesting folks.

Today, we’ll see the color of the U.S. April durable goods, which is not expected to be a “warm and fuzzy for the economy” data print. The forecast is for a decline of -1.5%… But, hear me now and listen to me later… If the print is really this bad, the media will sweep it under the rug, or spin it to sound like good times at Ridgemont High!

So… There you have it! The currencies are drifting about, and are waiting for new signs to give them direction. With that, we’ll head to the Big Finish.

Good day… And a Terrific Tuesday to you! I hope your three-day Holiday Weekend plans went well, and you had a grand time… The weather people told us all week that Saturday and Sunday would be sunny and 80, and that Monday we could expect rain. We got rain Saturday and Sunday, while Monday was the “pick” day… Figures, eh? We put men on the moon using slide rulers, and can’t forecast the weather.

OK… Friday was a “get out of town” day for many, and the currencies were left “for another day”, which is to say… We traded within a very tight range. Yesterday, I checked what was going on, as the United States and the United Kingdom were both on Holiday. Talk about thin markets! Anyway, I checked and it looked as though the dollar was drifting lower most of the day, only to see a reversal this morning as London returned. I don’t know what’s on their minds, buying dollars… But that’s what’s happening as I write.

One currency bucking the bias to buy dollars right now is the New Zealand dollar/kiwi (NZD), which had taken a backseat to the Aussie dollar (AUD) in recent times. New Zealand has seen some better data lately that has helped kiwi to higher levels. The recent business survey was mixed, but had more “good things” than bad things. This has left some traders believing the Reserve Bank of New Zealand (RBNZ) will have to delay their first rate cut in years.

To me, I think there are too many questions hanging over New Zealand like the Sword of Damocles to outweigh the high yield offered by kiwi. The RBNZ next meets on June 5th… That will be a very important meeting, and I personally would hold off with any kiwi purchases until you know more from the June 5th meeting.

The euro (EUR) hit 1.5820 overnight in Asian trading, but has seen that move erased during the London trading session… As I said above, I don’t know what the Londoners know that the Asians don’t with regard to euros… But, they certainly have a bias to buy dollars this morning!

Inflation in the Eurozone is really making things difficult for European Central Bank (ECB) President, Trichet. Oil prices have been the main culprit here, but that’s what Trichet was forecasting as he led the ECB to raising rates, while the United States was slowing down. Those weren’t popular rate hikes, except with me, and anyone else that loves to see a central bank provide price stability.

However, now the ECB and Trichet are to the cheese that binds. The Eurozone economic growth is slowing down, and inflation is still rising… What to do, what to do? I’ll tell you what I would do if I were in Trichet’s shoes… I would turn the money supply spigot to “Off” and hike rates again! Want to nip inflation at the heels? Or do you want to take a huge bite at inflation? Doing just one of those things, nips inflation at the heels… Doing both, takes a huge bite out of inflation, and that’s what is needed here!

Brazil is experiencing some of the same problems as Australia… And it would behoove Brazilian officials to talk to Australian officials for some help in dealing with a rising current account deficit, while the trade surplus increases. Yes, this is a strange bird… But when you have a strong domestic economy, and a rising currency, you see imports grow, which eats at the trade surplus, but when you take in investments the current account takes on water.

OK… We’re not talking billions here… $1.5 billion is the Brazilian current account deficit, but, as I said, they’ll want to nip this in the bud before they start having problems with the current account like New Zealand has!

Speaking of current account problems… The U.S. has a colossal problem there… And its biggest drag comes from the trade deficit. There are a couple of things to think about regarding the trade deficit in the United States. First and foremost is that with the weak dollar it has “narrowed”… However, oil has not allowed the weak dollar to really work on the trade deficit, as oil’s part of the deficit soars. Which brings me to another reason why I believe the dollar will continue to weaken in 2008.

And that is… Drum roll please… Protectionism… As I’ve explained many times in the past, the currency markets do not like any form of protectionism, and a country that puts protectionism in place usually sees the currency suffer. So, think about this for a minute… We have an election process going on in the United States that will come to a head in November, which is six months away. During that six months there will be candidates taking shots at OPEC and China (the two main “outside” culprits of the trade deficit… But we would never go after the U.S. consumer and tell him to save instead of spend now would we?). So, anyway… I see the candidates taking shots at these two “outside” culprits of the trade deficit, which will bring about thoughts of protectionism.

My friend, David Galland, has an excellent newsletter (he actually has a hand in many newsletters!) and on Saturday, he sent me a note with some great figures on oil for U.S. consumers. Let’s look at what David had to say…

“As we head into the Memorial Day weekend, Tom Kloza, chief oil analyst at the Oil Price Information Service, toted up the cost: ‘It looks as though we’ll pay about $1.5 billion to $1.6 billion each day during the four-day Memorial Day weekend, and that adds up to $6 billion to $6.4 billion in U.S. motor fuel expense,’ he said. ‘That compares with about $2 billion for the total Memorial Day weekend six years ago.’

“With consumers paying about $1 billion more each day for gasoline than they did six years ago, Kloza said, ‘You really wonder how much the U.S. consumer can take.’ And he added that the ‘more insidious increases are in the diesel segment… A back-of-the-envelope extrapolation would put diesel and heating-oil costs at about $807 million per day currently vs. about $217 million six years ago.”

“Net result: ‘We are seeing numerous bankruptcies among small and mid-sized trucking firms with more to come,’ Kloza forecast grimly.”

You can sign up for David’s daily letter here.

OK… This week the data cupboard will yield lots of home data, with the S&P Case/Shiller Home Prices data, and New Home Sales data today. Tomorrow we get Durable Goods. Thursday will see Personal Consumption, and on Friday, we’ll see two of my faves… Personal Income and Spending.

It’s a short week, and that’s fine with me! I’ve said it before and I’ll say it again… I love three-day weekends!

Before we head to the Big Finish… I want to tell you about Addison Wiggin’s new book. Addison has revised his Best Seller, Demise of the Dollar. Yours Truly wrote the foreword to the book, so that alone is worth the going price! Here’s a link you can click to find out more about the book and how to order one.

Good day… And a Wonderful Wednesday to you! I had a long time friend – once a colleague and teammate on the company softball team – send me a note from Credit Suisse yesterday, that called for an end to the European currency strength versus the dollar. I love getting this stuff because, as they said in the Godfather… Keep your friends close, but your enemies closer… Yes, I like to see “their” side of the story.

In this case, it’s not too far off… While I think the European currencies, led by the euro (EUR), have more room to gain versus the dollar, you have to admit that the bulk of the euro’s gains are in the rear view mirror. But before everyone picks up their phones to call and sell their euros… WAIT! Think about this for a minute… The euro is the second most liquid currency in the world. It has taken over as the offset currency to the dollar. So… If the dollar were still going to weaken (which C.S. admitted it would), then the euro would see the offset trade. And… If the Asian currencies take over as the next shoe to drop for the dollar, as I’ve said they would for two years now, then the euro would see strength on the flip side of cross trades.

I’ve explained these cross trades before, but for the new readers, let’s review… Class, get out your #2 pencils… Currencies are traded in “pairs”. You are always shorting one currency and going long another currency. As U.S. investors, your base currency is dollars, so when you buy euros or yen (JPY), you are shorting the dollar and buying euros or yen. But U.S. investors aren’t the only players in this arena. You have investors around the world that have a different base currency… So you end up with “cross” trades – currencies that cross each other in this arena. Clear as mud? Sorry… This is the way I know how to explain it.

So… Euros, for instance, could gain in value due to people buying yen… On the crosses… And so on…

Alrighty then… I’m sure this will all sink in as you sink your teeth into your morning Honey Bun!

This morning, the euro has added to its gains from yesterday, as the German Business Confidence – as measured by the think tank, IFO – unexpectedly increased this month. I was all set to talk about the IFO being the more important measure of the German economy this morning, so… Let me go ahead and do just that! Yesterday, we saw weakness in the ZEW report on economic expectations… But that didn’t hurt the euro too much. The reason? The markets put more stock in the IFO report because it measures “current conditions” and therefore can be used as proxy for the European Central Bank (ECB) and their interest rates projections.

I saw a report on the IFO’s correlation with the euro’s past moves to higher ground… Made sense to me, as strong IFO reports came out right before the euro moved past previous big figures… Could certainly be the case again for the euro, eh?

So… The 1.56 level was taken out overnight, and as I write, the euro is trading well above the 1.57 level. Again, it’s too soon to tell if this is a “true reversal” of the sell off the past few weeks, or a false dawn… But to me, it certainly looks like we’re heading higher once again, and the negativism toward the U.S. dollar is slowly creeping back into the mindset of the markets.

The commodity currencies of Aussie (AUD), Canada (CAD), and Brazil (BRL) all “have it going for them” these days. Shoot Rudy, the Canadian loonie doesn’t even have the high interest rate like Aussie and Brazil, but with oil hitting $129 yesterday, it doesn’t seem to matter. I think that the markets have fully priced in one more rate cut from the Bank of Canada. With that out of the way, and commodities booming, the loonie could shake loose the pull down from the Bank of Canada!

I’ve heard a lot of talk about how people believe this commodity bull market is the latest “bubble”. Hmmm… That may be… But historically speaking, we’ve got a ways to go (time wise) before this bubble pops! Remember a month ago, when I kept telling you that the mass media didn’t know what they were talking about when they kept saying the bull market for commodities was over? I don’t hear these guys spouting off now. I wonder where they went? To hide under a rock?

I’m not going to dwell on this… But it just didn’t make sense to me that the bull market in commodities was over… And, now, we know why it didn’t make sense! Because it wasn’t over!

Second in command, Fed Head Kohn spoke yesterday, and sounded quite upbeat about the economy. Singing Ray Stevens… Everything is beautiful… What else did you expect? These guys have backed us into a corner that has three roads out… And none of them are a road to prosperity! 1. Inflation 2. Deflation 3. Stagflation… Oh… And they all merge with the recession highway!

Anyway… Fed Vice Chairman Kohn, speaking about interest rates said, “[it] appears to be appropriately calibrated for now to promote both rising employment and moderating inflation over the medium term.” The markets took this statement to mean Kohn was telling us that the Fed is unlikely to lower rates further.

Well… Baby, baby, it’s a wild world… And it’s hard to get by on just a smile. Kohn should be reminded of these words when the Fed comes back to the rate cut table later.

Speaking of the Fed… We’ll see the color of their last meeting minutes this afternoon. This was the meeting that they cut rates from 2.25% to 2%. I wonder if these meeting minutes will be in line with the press conference that was held after the rate cut… The reason I say this, is the suspicion I have toward the Fed after reading Bill Fleckenstein’s book, Greenspan’s Bubbles: The Age of Ignorance at the Federal Reserve.

The Fed will also be releasing their new growth and inflation forecasts. This ought to be worth the price of admission folks. What yarn will they spin for us? I’ll bet they tell us the future is so bright we gotta wear shades! And inflation? Don’t worry about it! Yeah, when the Fed says, “Don’t worry about it” you had better run for the hills!

How about gold? Did you see that rise in gold yesterday? When I left it was up over $15 on the day. The London Exchange issued a report showing that demand for gold was down 16% in the first quarter. That makes abundant sense given the losses gold put on the books in the first quarter… But now that the markets are coming to their senses, and the dollar is weaker (while oil continues to set records every day), gold is back in demand.

And speaking of gold… Remember about a month or so ago, I told you about how the dollar’s weakness had caused so much loss of purchasing power for us, and illustrated it with this: If you purchased oil with euros instead of dollars, the price increase in oil would represent 92%, which sounds high right? Well, since you don’t purchase your oil in euros, but dollars instead, your price increase represents a 319% gain! Well… To take this exercise one step further… If you had purchased your oil with gold, your price increase would be 57%! Now tell me again, how gold isn’t doing its part to provide an inflation hedge?

Good day… And a Marvelous Monday to you! Man… Talk about hitting the wall! I got home on Friday afternoon, sat down in my recliner, and fell asleep for hours! The last few days on my four weeks of cancer meds, this last week has been awful for me… But… I carried on, and I doubt anyone at the Money Show noticed me being uncomfortable and in pain.

The Las Vegas Money Show was quite good I believe, one of the better ones with regards to people having interest in what we do. It’s still nice to receive the “good to see you” and well wishes from readers that stop by the booth.

OK… Well… Friday saw some chinks in the dollar’s armor, and the euro (EUR) was marked up as the day went on. The U. of Michigan consumer sentiment index dropped to 59.5 in early May, its lowest level since 1980, from 62.6 in April. The decline was below the experts’ expectations calling for a dip to 62.0.

There was also news that U.S. housing starts posted an unexpected increase… But, really folks, is that a good thing? Empty homes a.k.a “inventory” is the major problem in this housing glut, so should we really get excited about “more homes” being built? I don’t think so… And apparently neither did the currency players, as this news was largely ignored.

In the overnight market, the Asians have really taken the dollar to the woodshed, pushing the euro to 1.56. Wasn’t it just last Monday that the euro dropped to 1.5365? This overnight move is being pushed by the thought that home sales, the more important part of the housing data, will show another decline, thus dropping for the second consecutive month.

Then there was a subtle little statement by the U.S. Treasury Undersecretary that I believe helped usher the dollar on its way to the woodshed. U.S. Treasury Undersecretary, David McCormick urged China to quicken their currency reforms. Now, I know, you’re saying what’s new about that, Chuck? Ahhh grasshopper… The dollar had rallied lately and the calls for Chinese currency reforms were nowhere to be seen. This statement reminded the markets that in the end… The U.S. Government wants a weak dollar… And if that’s what they want, currency traders and participants are happy to oblige them!

I don’t know at this point if this is a true reversal of the dollar rally or a false dawn… But either way… Just to see some chinks in the dollar right about this time is probably a good thing to currency holders!

The key focus for the United States this week will likely be the release of April’s FOMC minutes on Wednesday, which should provide some indication as to who is winning at Battleship. No wait, we’re looking for indication on who is winning the battle for rate hikes or rate cuts. The rate hike hawks have dominated of late on speculation that the Fed has ended its easing cycle, and the next U.S. rate move will be a hike later this year.

Of course you know me… I’m still keeping the light on for another rate cut by the Fed this year, which should really throw a spanner in the rate hawks’ works.

And getting back to last month’s -20K job loss posting… I’ve already highlighted the BLS ghost jobs that totaled 260K… But now this… The sum of state payrolls just came out for April showing -151K jobs, versus the actual preliminary release earlier this month of -20K. This hints at a potentially large downward revision to April payrolls when the May data is released.

I’m currently reading a new book called, Greenspan’s Bubbles: The Age of Ignorance at the Federal Reserve written by William Fleckenstein. You know that name as the guy who writes financial columns on MSNBC. I met Bill Fleckenstein a few years ago… He told me I was bang on with my banging on the Fed. Well, his new book is awesome at pointing to the mistakes that Big Al Greenspan and the Fed Heads made over and over again… More on this in the future…

Today, we’ll see the color of the latest printing of leading indicators here in the United States. I suspect they will show no gains, thus leaving the people like me that believe the recession is already in place, with reinforced thoughts.

We won’t see the above-mentioned existing home sales report until Friday… So, we’ll probably drift around all week… But at least we’re drifting in the right direction!

I was writing our monthly newsletter to clients, The Review & Focus, last night (yes, on a Sunday night!) and highlighted the Aussie dollar (AUD)… Through all the dollar strength the past couple of weeks, there were a couple of currencies that remained resilient… Aussie dollars, Brazilian reals (BRL), and Canadian loonies (CAD)… That’s no coincidence either! As I kept telling people last week… Look at positive balance of payments currencies and currencies from countries that provide the world with something they need! Voila! Aussie, Brazil and Canada!

The Aussie dollar has pushed the door of 95-cents wide-open overnight, and Canadian loonies have passed the parity level to the green/peachback. Aussie is looking quite perky, which is good for my thought that Aussie too would reach parity to the green/peachback.

Aussie dollars have a central bank that will either keep rates unchanged or move them higher, while the loonie has to fight with a central bank that wants to keep in step with the Fed’s rate cuts… So… Look for Aussie to outperform loonies, kiwi (NZD), and reals going forward based on this rate outlook.

Now that was some great news that Chris brought to you regarding Iceland on Friday, eh? The poor krona (ISK) was in need of some good news, and when the Nordic Banks pledged to provide liquidity to the Icelandic Central Bank, it was just what the doctor ordered! But… Please do not take this as an endorsement to buy Iceland again. Instead, I believe that this news gives us better levels to sell when our CDs come due.

Someone asked me at the Money Show last week, what I would buy with the Icelandic krona proceeds… Well… I would either cross to Norway (NOK) or Aussie… There are two great economic stories right there, with little chance of going the way of Iceland.

And how about bold? The shiny metal enjoyed its best week in about two months it seems, and has come back to the $900 level and beyond. I have to admit that the $900 handle looks much better hanging on gold than the lower number it wore for too long!

Good day… And good morning from beautiful downtown Panama. Chuck had to get on a plane back to St. Louis early this morning, so he asked me to pfill in this morning. The dollar mostly traded within a range versus most of the major currencies yesterday as negative news from the United States was offset by predictions of a possible FOMC rate rise. The biggest movers yesterday were the commodity currencies and the ISK, which was helped by the Nordic central banks. More on that later, but lets start with the data due out in the United States.

The Reuters/University of Michigan consumer sentiment index will likely show a drop to a 26-year low when it comes out later this morning. The other major report released today will probably show that housing starts in the United States fell to a 17-year low in April. Home construction and property values “seem likely to decline well into 2009,” Federal Reserve Bank of San Francisco President Janet Yellen said earlier this week. And a jump in foreclosures, as values fall and adjustable rate mortgage costs rise, is adding to concern. Foreclosure filings climbed 65% and bank seizures more than doubled in April compared with a year earlier, according to figures issued this week.

The U.S. economy is in a recession, and the over-leveraged U.S. consumer won’t be able to ride to the rescue as they have in the past. And I don’t expect the stimulus checks to help much either, as they are way too little too late. The fundamentals of the U.S. economy don’t look good and this dollar rally will not last past the end of the second quarter. But short term, we could see additional dollar strength as investors focus on future FOMC moves.

Both the Federal Reserve and the Bank of England have had to admit that inflation is rising faster than they expected, leading currency traders to predict an end to their interest rate cuts. Higher inflation numbers have caused future traders to increase their bets that the Fed will reverse recent cuts later this year. This change in sentiment has helped push the dollar higher, but the move will likely be short-lived as the markets will realize that the FOMC is just too far behind in their fight with inflation. As prices continue to move higher, the U.S. economic growth will slow even further and the dollar will resume its steady decline.

Nordic central banks rode to the rescue of the Icelandic krona (ISK) this morning as they announced they have agreed to provide as much as 1.5 billion euros in emergency funds to Iceland’s central bank. We’ve written at length about how the credit crisis has spilled into the Icelandic banks, and recently the liquidity in the ISK has all but dried up as currency dealers questioned the financial stability of the Icelandic central bank. Traders have been concerned that the Atlantic island’s commercial banks may seek help from Sedlabanki (Iceland’s central bank) which doesn’t have the funds to bail them out. While the size of the swap agreement wasn’t large enough to move the krona, the announced cooperation seems to have restored at least some of the lost confidence. With the support of the central banks of Norway, Denmark, and Sweden, the Icelandic krona rallied more than 4.4%, the biggest gain on record.

In other news from the Nordic region, the Danish central bank raised its benchmark interest rate by 0.1% to 4.35% today.

Japan’s economy grew faster than economists estimated as exports to the rest of Asia helped offset the U.S. slowdown. Gross domestic product in the first quarter of 2008 grew 3.3% in Japan, well above estimates. Net exports accounted for most of Japan’s growth as demand from Europe and Asia continues to be strong. The figures coincide with reports released yesterday that showed the German economy expanded at the fastest pace in 12 years. Both of these reports confirm our thought that the global economy will not be dragged down by the slowdown in the United States.

But the currency markets ignored the positive surprise in Japan and the yen (JPY) continued to sell off. As Chuck pointed out earlier in the week, the carry trade is back as market volatility has eased. Japan’s currency slid the most against the Aussie dollar (AUD) and New Zealand dollar (NZD), both of which benefit from the return of the carry trades. With the markets generally range bound, volatility has decreased encouraging investors to borrow funds in the nations with low rates and invest where returns are higher. This week’s sell off of yen reflects a return to risk-taking activity and a revival of carry trades. Ultimately the currencies will return to trading on economic fundamentals, but for now the carry trade is continuing to dominate.

Currencies today 5/16/08: A$ .9449, kiwi .7675, C$ .9992, euro 1.5457, sterling 1.9479, Swiss .9465, ISK 74.43, rand 7.4835, krone 5.0855, SEK 6.0402, forint 160.20, zloty 2.1922, koruna 16.16, yen 104.77, baht 32.285, sing 1.3715, HKD 7.80, INR 42.65, China 6.9950, pesos 10.436, BRL 1.653, dollar index 73.28, Oil $125.58, Silver $16.81, and Gold… $886.90

That’s it for today… Had a great dinner with the folks from the Sovereign Society last night. I know it sounds like I came down here to Panama kicking and screaming, but this conference has far outweighed my expectations. The investors are knowledgeable and excited by the opportunity to diversify out of the U.S. dollar. Hopefully I will be able to convert a few of them over to the EverBank family. Got to get back downstairs now, as I don’t want to miss an early presentation by one of last night’s dinner hosts. Hope everyone has a Fantastico Friday and a great weekend!!

P.S. To get The Daily Reckoning sent directly to your inbox, sign up for our free email newsletter, or if you prefer to use RSS, subscribe to the Daily Reckoning RSS feed.

Source: U.S. Housing Continues to Slump

The Jobs Jamboree… Can you believe that so much attention and drive to the markets is tied to this?

The dollar is a bit softer this morning going into the Jobs Jamboree, and rightly so, given the forecast. However, the dollar is still swinging a mighty hammer and I’m a bit perplexed by this. Last night I was up late (for me) and decided to put down some thoughts that were bouncing around in my head.

Well… How about that U.S. dollar? That’s some currency, Rudy! Why, look at it rallying against the euro (EUR) and other currencies as if it’s on a mission from God! It looks as if the United States has turned things around. The deficit no longer needs to be financed with over $2 billion a day in foreign investment… Interest rates are where they need to be to fight this soaring inflation… The government has stopped spending wildly, and the budget is balanced… The mortgage lenders have recovered all of their losses… There is no longer a credit crunch… And finally, the war is the Middle East is over.

But Wait! Unless I pulled a Rip Van Winkle and slept through all of that… These things haven’t happened, nor do they look as though they might begin to happen any time soon! So, what the heck has the dollar bulls dancing in the streets swinging a mighty hammer?

You’ve got me on this one. Folks, for once, I’ll admit that I have no idea what the heck is going on here… Serenity Now! Is this the pullback in the euro that I said we should look for in January, but never saw? If so… When will the tourniquet be applied to this gushing wound? Hmmmm… Good question! And I don’t have an answer to that either! I thought back in January when the euro was around 1.45, that we could see it fall back to 1.40, before moving ahead again… But that never happened. Instead we saw the euro climb to 1.50, then 1.55, then 1.60 in a little over three months time. Was it too quick? Is that what we’re seeing, merely a technical correction? Or is there something else in the works here?

Again… I don’t know the answer… But I’m hoping that in the days to come, it becomes apparent, and when it does, I’ll be Johnny on the Spot in reporting it to you! (Notice I said, “I’ll be Johnny on the Spot”, and not I’ll be “A” Johnny on the Spot! HAAHAHAHAHA)

This dollar rally has got the “naysayers” coming out of the woodwork too. Oh, the whole lot of them are pointing fingers and claiming they knew the dollar was undervalued, and blah, blah, blah… Where were these guys when the euro hit 1.60 about 10 days ago? They were hiding under the sheets!

Forgive me for this but this reminds me of when I coached my darling daughter Dawn’s girls softball team. The girls would do these chants on the bench that drove me nuts! But there was one that would just make me want to scream! We would be getting beat unmercifully, and the girls would be chanting something that ended with, “We can beat your team any old time.” UGH! But that’s what the naysayers are reminding me of right now. They are chanting about the dollar, when it has gotten beaten unmercifully for six years.

OK… Onto other things… The U.S. ISM Manufacturing Index remained well below the 50 level for the third consecutive month. I saw a news story yesterday where the writer was seriously talking about how Manufacturing will pick up due to the stimulus checks, as the receivers of those checks go out and spend them. Folks… The writer was serious…

I’ve told you over and over again that these stimulus checks might get spent by some… But I don’t see the checks getting spent by most. Instead, I see them using the money to pay down a credit card, or some form of debt, as the past couple of months has been quite sobering to the U.S. consumer.

Hey! You’ve got to feel good this Fantastico Friday, as U.S. Treasury Secretary Paulson is telling anyone that will listen, that we are “closer to the end” of the credit crisis. Oh, now that gives me a warm and fuzzy, given his track record of spouting off stuff like that in the last year!

I’ll bet him a shiny quarter that we’re only halfway through the credit crisis! The Bank of England (BOE) said yesterday that they feel as though the “worst is over” . Hmmm… Maybe these guys know something I don’t!

Down Under in Australia, retail sales surprised on the upside, printing at +0.5% versus the +0.3% that was forecast. Retail sales account for 40% of private consumption, which in turn accounts for around 60% of GDP… So this is important data for the Reserve Bank of Australia (RBA). The RBA will not need any excuses to keep rates at current levels given the strength of this data… And that thought should be a good underpinning for the Aussie dollar (AUD).

The U.S. stock market has been on a feeding frenzy since the rate cut on Wednesday. All this euphoria in stocks has the carry trade going great guns once again… This is being reflected in the price of yen (JPY) and Swiss francs (CHF)… I just don’t see how this can continue to go on and on and on. The carry trade has longer lasting power than the Energizer Bunny! But one day, it will all come crashing down like a house of cards… At least that’s my opinion.

There was another story yesterday about the Gulf States ending their dollar peg. This is getting out of control! About every three months these guys get together and make big plans to drop their dollar peg, and the media goes hog wild over the story. Shoot Rudy, I used to get all caught up in it too until I realized they were just being the boy who cried wolf.

Good day… And a Marvelous Monday to you! Two of three from our second most heated rival, the Astros, makes for a good weekend at the Butler House! Should have been a sweep, but I won’t get greedy! The currencies in the overnight market have started to show some healing from last week’s meltdown… So, let’s get to it!

First off, front and center this morning, the euro (EUR) is leading the pack (vroom, vroom) this morning after rallying all night in Japan, and now Europe. I was talking to a trader from a BIG BROKERAGE HOUSE the other day, and I mentioned that I had seen plenty of stories in the past few days that made it sound as if the markets had changed their mind regarding a Fed rate cut this week. The trader mentioned that the percent of those polled thinking there would be a cut had fallen during the week, but was still around 75%.

I really thought at that time that the fall from the high 90% thinking there would be a rate cut to 75%, probably had a lot to do with the dollar rally last week. I still think that’s the case. One of these days we’ll see Big Ben change his tune on rate cuts to appease the markets, and affix his eyes on the inflation balloon that is now hovering over us. I even heard some dolt on our local radio station yesterday tell the audience that “inflation isn’t a problem”. HAHAHAHAHAHA! You should have heard me yell at the radio!

The dollar has two items hanging over its head like the Sword of Damocles this week… First, the Fed meeting on Wednesday… And Second, the Jobs Jamboree on Friday. We’ll be into May by then and the dollar bulls might be yelling “May Day” once that Jobs report prints on Friday, given the forecast right now stands at a negative -78K.

So… Who’s mast are you going to pin your colors to this week… The dollar’s…or the euro’s?

OK… Long time readers know how I continue to believe that the balance of payments is going to continue to weigh on the dollar. I tried to make this point on CNBC but they would hear nothing of it… So, instead I turned to my Pfennig readers, of which, there were probably more reading what I wanted to say than people watching CNBC! HA! (I jest, I know better!)

Well… Wanna see something that really plays well with my thought that the financing of the deficit is going to be the biggest problem for the dollar? Japan owns more Treasuries than any other nation. After raising their holdings by $9.2 billion to $620.6 billion between March and July 2007, Japanese investors trimmed that stake by $34 billion through February, the U.S. Treasury said April 15. And why not? The Japanese just posted a 7% loss on their Treasury holding in the last quarter!

So… The “pain meter” for the dollar just went up a few notches… As the story on the Bloomie said… “Add another ailment to the U.S. misery index of soaring gasoline and wheat costs and falling home values: a Federal Deficit that’s is burgeoning as foreign investors led by the Japanese recoil from the slumping dollar.” Couldn’t have said it better myself!

This is scary stuff folks… I don’t mean to cry wolf here… But it’s something to keep an eye on. This is a scenario that I’ve explained over and over again the past few years… That it was something back in the deep dark closet of scary things for the dollar. I don’t think that it has been dragged out of the deep dark closet just yet, but it has moved closer to the closet door.

On Friday, we saw a little bit of healing in the currencies after the U. of Michigan Consumer Confidence Index fell to it’s lowest level since 1982 in April. This was alarming, given the fact that the “experts” had thought the report would not show additional weakness from the previous reading. The 53.3 index level is firmly in the range that is historically associated with a recession.

I had two radio/podcast interviews on Friday… Since I have the face for radio, the PR people are lining the interviews up for me… I like these, because the interviewers let me talk… Too bad they have just regional reach.

OK… Besides the Fed meeting – which by the way is a two-dayer – what these guys do for two days, besides playing Battleship or Risk is beyond me! OK, back to what I was talking about, besides the Fed meeting, and the Jobs Jamboree, this week is chock-full-o-data, that will probably really weigh heavily on the dollar. Here’s the roster o-data…

Tomorrow we get to see the color of the latest GDP report for the first quarter (should be an anemic 0.4% growth, which without Government spending (we are fighting a war) would most likely be very negative. We’ll also see personal consumption, which the Fed looks at for signs of inflation. (I think they need another barometer… It’s called the Pfennig!) We’ll see the Chicago Purchasing Manager Index (manufacturing), and then two of my faves, personal income and spending.

On May Day, we’ll see the latest ISM Manufacturing Index, which is expected to remain below the contraction line of 50. There are other second tier reports sprinkled throughout the week, so it’s not going to be an easy week for the dollar, as it was last week!

With the dollar weakness overnight, gold has bounced back over $5. Oil has pushed back to within spittin’ distance of $119. Could this be the beginning of the next leg up for the commodities against the dollar? Don’t know the answer to that question… But figured it was worth everyone taking a moment to think about it.

One currency that’s not following the euro higher this morning is Japanese yen (JPY)… The Bank of Japan (BOJ) is expected to lower its growth projection for the current year when it releases its twice yearly outlook on the economy this Wednesday. In addition, the BOJ will most likely leave rates unchanged at the meeting on Wednesday. I think that yen gets more play in the carry trade than it does on its own data. And so it goes with yen… I still fully expect it to recover this lost ground and get back to 100 and beyond, but it will require a risk event to play out, that unwinds carry trades again.

In New Zealand, could the trade deficit finally be getting some relief? The February report showed a trade surplus for the month, at NZ$ 258 million. The March report will print tonight and is expected to be an even larger surplus number! WOW! New Zealand turning the tables on their HUGE deficit? Well… That would be grand! But, they’ve got a hard row to hoe with getting their trade deficit straightened out. But these monthly surplus reports are certainly a step in the right direction!