That didn’t happen. Instead, the Fed issued a fairly neutral statement. It said “downside risks to growth remain” – dropping a reference in June’s statement to “diminished” dangers – and price increases are of “significant concern.”

Chris Gaffney in The Daily Reckoning says the statement indicates the Fed realizes it will be forced to leave rates untouched. This leaves Mr. Market is to focus on the European Central Bank. Expect more inflation fighting from Jean-Claude Trichet and his pals…

The Eurozone has been posting some pretty poor numbers. Just this morning Germany reported that factory orders in the second quarter dropped for a seventh straight month in June. Manufacturing has slowed in Germany and Europe, as a stronger euro (EUR) has weighed on demand for exports. The continued slowdown in German industrial production increases the likelihood that the Eurozone is slipping into a recession.

But the ECB has never wavered from their mandate for price stability. This dogged fight against inflation will help maintain the long-term value of the euro. This latest dollar rally just doesn’t make sense when you look at the overall global economic picture. Yes, growth in the Eurozone is slowing, and Germany may be slipping awfully close to a recession, but the United States IS in a recession! And while the impotent FOMC sits back and ‘hopes’ that inflation will abate, the ECB has had the courage to continue its fight against inflation.

The past month has been hard on holders of foreign currencies, but investors have to look past this dollar correction. Only three major currencies have outperformed the euro since the beginning of 2008: the Brazilian real (BRL), Mexican peso (MXN), and Swiss franc (CHF). In the long run, I have to believe the inflation fighting of a strong ECB will help to maintain the euro’s value versus the U.S. dollar.

So today the markets’ focus will shift to the upcoming BOE and ECB interest rate meetings. ECB President Jean-Claude Trichet is expected to keep interest rates unchanged, but may signal that higher interest rates will be needed to combat inflation. Trichet will hold a press conference after the ECB announces its decision tomorrow, at 1:45 PM in Frankfurt. The currency markets will be listening to his every word, trying to uncover any indications of a change in his hawkish stance against inflation. Until then, the dollar will likely remain in a fairly narrow trading band versus the euro.

The Bank of England is also expected to keep rates unchanged, but the pound (GBP) will likely continue to come under pressure as many feel the BOE has been ineffective in its policy decisions. U.K. consumer confidence fell the most in at least four years, as England deals with a housing market slump that rivals our own. The markets have lost confidence in the Bank of England’s ability to deal with the current economic situation, and the pound continues to fall because of it.

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Source: Fed Not as Hawkish as Expected

Good day… And a Wonderful Wednesday to you! The landscape is very different this morning than when I signed off yesterday. The dollar has fought back and found a new person to back U.S. Treasury Secretary Paulson’s claim that he supports a strong dollar. That person is Fed Chairman Ben Bernanke, which is quite strange for a Fed Head to be talking about the dollar.

So… Here it is folks… I’m going to get on the soapbox now and give you my Pfennig’s worth of what I think of Big Ben Bernanke and his words yesterday, along with some general thoughts on reforming the Fed. If that’s not your bag, baby, then skip ahead to the section marked “***”… There I’ll take up an explanation of my thoughts yesterday toward China… So… If you’re ready, I am…

OK… Now I’ve heard just about everything when it comes to central bankers! Big Ben Bernanke threw a cat among the pigeons yesterday when he broke the long standing tradition of relative silence (for a Fed Chairman) on the dollar… (This is the U.S. Treasury’s baby!) But I guess since Big Ben has been so instrumental in the weakness of the dollar, he probably thought he was “qualified” to talk about it!

Big Ben signaled to the markets that he was “uncomfortable” with the weakness of the dollar, and the ramifications that a weak dollar has on inflation. He actually blamed the weak dollar on inflation! Whoa there partner! You’re barking up the wrong tree!

You see… Inflation as I’ve explained to you for a couple of years now is rising, even though the stupid CPI data doesn’t reflect what you and I feel has been going on with our cash. Well… Big Ben finally has admitted that there are rising inflation fears… (Sorry Ben, but inflation is eating us alive… These aren’t just inflation fears!)

Anyway… Big Ben sees inflation (good for him!), but wait… Blame inflation on the weak dollar? That’s putting the horse, and another horse, before the cart, Big Ben!

Now, I’m not saying that a weak dollar doesn’t play well with inflation… But I would think – and unfortunately the markets don’t see the trees in the forest on this one – that everyone would call this for what it is… Big Ben is blaming something else!

Inflation is more associated with low interest rates… And money supply… Things HE CONTROLS! So… Having low interest rates and money supply running at 16% isn’t causing inflation, Big Ben? I say… This has gone on long enough! Someone on Capitol Hill needs to stand up and call him out on this one! I’m seething with anger toward this right now! And anyone getting caught up in his attempt to scare the markets into thinking that the Fed is going to intervene to shore up the dollar, should be grabbing their pitch forks, rakes and shovels and heading to Capitol Hill!

Big Ben has now gone on record with jawboning the dollar higher… And placing blame on something other than himself for this inflation mess. Oh great! I shake my head in disgust… Pardon me, I’m going to go yell at the walls, I’ll be back in a minute!

OK, I’m back! But still angrier than a wet hen! The gall of this guy to try to deflect blame that should be directed at him… And what’s even worse is that the markets bought it all, hook, line, and sinker!

So… After two days of risk aversion, and dollar selling… It all went down the drain. The markets are so assured that the Fed will intervene (and long ago I learned that the markets are never wrong… But in this case, I’ll make an exception… And say, they’ve got it all wrong)… The Fed doesn’t even need to intervene – they just did so verbally!

First we had Big Al Greenspan making one BAD decision after another for 18 years! Now this! Something has to be done here folks… It’s time there was some reform of the Federal Reserve! Let’s review this… One man appoints another… The man that does the appointing has a term limit, but the new appointee does not… There’s no age limit… And – now this is the part that really needs to be reformed – no review of the appointee’s work. In other words… The Fed Chairman can send the economy into the abyss, and he has no one to answer to! It’s time voters told their elected officials that this has to stop!

And if you don’t believe me that Greenspan has a track record that’s longer than a country mile on bad decisions, then you need to pick up either William Rutherford’s book, Who Shot Goldilocks? or William Fleckenstein’s book, Greenspan’s Bubbles – The Age of Ignorance at the Federal Reserve…

***

OK… Enough of that… We saw the euro (EUR) lose one and a half cents yesterday after Big Ben threw the cat among the pigeons. Now, it will be interesting to see how long it takes to recover – or if it will. My guess is that it will because there will be someone out there besides little ole me (HA!) that will call Big Ben out on this.

Yesterday, I told you about China’s FX reserves and how they just set a new record in April… I said something that confused a few people, so let me try to explain… First and foremost, I truly believe that a strong currency helps fight inflation. I’m on record for many years saying that, and many times saying that about the Chinese renminbi (CNY)… Yesterday, I said that the Chinese officials might have to slow down the appreciation of the currency to fight inflation… Now, I know that’s counterintuitive to what I said earlier… But let me explain what I’m talking about…

The amount of Hot Money coming into China is fueling inflation faster than the Chinese can combat it. They could allow the currency to float and its increase would go a long way toward shutting down inflation from Hot Money… However, that’s NOT GOING TO HAPPEN! So… The Chinese have to think of a way to shut down the HOT MONEY, and if they make the renminbi have the appearance that it will be slow to appreciate, the thought here would be that the Hot Money would grow impatient and leave. I never said that China should STOP the appreciation of the renminbi… Just make it appear to slow down, to have the Hot Money leave.

So… It’s been a tumultuous 24 hours in the currencies… Stocks took one on the chin yesterday too, but for different reasons. Earnings reports and the report by Tyson Foods that said it is working with the U.S. Department of Agriculture to manage a flock of breeder hens exposed to a low-pathogen strain of avian influenza. Tyson says no chickens are affected, but the report was out there already.

That’s Bird Flu… Nothing is confirmed so I’m not trying to say anything about it except that the report threw stocks into a loop.

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 a Wonderful Wednesday to you! Well… My first day at the Las Vegas Money Show went well. This place (Mandalay Bay) is so big and spread out; there’s just too much walking for me. My presentation went well, I think; it’s just too difficult to tell anymore for me.

Front and center this morning we have the government telling us that inflation was less than forecast last month. Just who do they think they’re kidding here? I didn’t just fall off the turnip truck! CPI rose 0.2% versus 0.3% forecast, putting the annual rate at 3.9% versus the previous 4.0%… Just doesn’t sit well with you does it? Oh well… We carry on despite the dolts we have to work with!

Another piece of data already out this morning has foreclosures in the United States climbing 65% in April, and bank seizures more than doubling in the same period. RealtyTrac Inc. said this morning that there are more than 243,300 properties, or one in every 519 households, that were in some stage of foreclosure, which happens to be the highest monthly total since they began to keep the data!

Oh, but don’t worry about all of this folks… Fed Chairman Big Ben Bernanke says the worst of over! And before I get away from all this, Freddie Mac, the second largest mortgage finance company, posted a $151 million first quarter loss… And… I would bet they “fudged” the numbers to make them look “this good”!

I shake my head in disgust of the stuff we have to deal with… The lies, the cooked books… UGH!

Alright, I’m back now… I was away for a minute to yell at the walls!

The softer inflation data this morning is allowing the euro (EUR) to gain some ground versus the dollar, as the market puts the Fed warnings of rising inflation and eventual rate hikes in the United States on the back burner.

Yesterday, we saw the euro lose a little ground after Fed Head Janet Yellen was wishing, and hoping and thinking and praying that the economy would be strong enough to raise rates. Oh give me a break! She’s grasping at straws! Yellen stated that she “would be pleased” if the economy was strong enough to raise rates by year-end. That’s all nice and sweet, Ms. Yellen… But did you realize you would move the markets with that “wish upon a star”?

Our friend, Jim Rogers, is back in the news today talking about the dollar rally. Let’s listen in…

“The dollar is going up, which is useful for people who want to sell the dollar down the road. With things the way they are, I would rather buy the Swiss franc and Asian currencies.”

Jim Rogers was also of the thought that carry trades are going to be reduced…

I’m all about this, and agree with our friend… This is the stuff I pound out on the keyboard almost every day. The carry trade is a “risky trade”, and when risk enters the markets in a big way, like I believe it will this year, the carry trade will be unwound, thus benefiting Swiss francs (CHF) and the low yielding Asian currencies.

Last week I told you about the Chinese renminbi (CNY) and how it had stalled at 6.98. There was a report this morning that Central Bank Governor Zhou signaled that slowing exports would see an easing in the pace of renminbi gains. If you recall that talk last week that I gave, this is what I was talking about… Slowing gains in the renminbi, (as if they weren’t slow enough already!)

The Canadian loonie (CAD) is knocking on the door to parity with the dollar again this morning, as it swaps places with the Swiss franc, which was at parity last month but has fallen back.

The Japanese yen (JPY) is getting sold again. This is a back and forth tug-o-war with yen… But in the long run, I still see yen gaining versus the dollar… But we’ve got to get that stupid carry trade off the books first!

One currency that has remained pretty “steady Eddie” during this recent dollar strength is the Brazilian real (BRL)… Of course I just put the “Chuck’s kiss-o-death” on the real… Anyway… I was talking to a customer yesterday here at the show, and listed the positive balance of payment currencies from Norway (NOK), Sweden (SEK), Switzerland, euro, Japan, and Singapore (SGD) as currencies an investor should look to. But added that Brazil and Australia (AUD) have the “things” the world needs, and should keep these currencies underpinned…

Currencies today 5/14/08: A$ .9350, kiwi .7630, C$ .9995, euro 1.5470, sterling 1.9445, Swiss .9485, ISK 79, rand 7.6550, krone 5.07, SEK 6.0150, forint 161.50, zloty 2.1920, koruna 16.15, yen 105, baht 32.40, sing 1.38, HKD 7.8, INR 42.45, China 7, pesos 10.50, BRL 1.6665, dollar index 73.31, Oil $125.37, Silver $16.89, and Gold… $870.20

That’s it for today… The BIG GUYS from Jacksonville were in town and came to my presentation yesterday. That was pretty exciting for yours truly. Since I got sick last summer, I haven’t had much opportunity to be around the Big Guys from Jacksonville (the home office), and just talk to them, etc. So, that was good… We also have two of our NY Operations people here with us at the show… Rachel and Tom are doing great! And Kathy from Jacksonville is also here, so we’ve got plenty of help. I go back to the days when it would just be Chris Gaffney and I all day at the booth… Chris is on his way to Panama this morning… Better him than me, that’s all I can say! I hope you have a Wonderful Wednesday!

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Source: More Bad Data for the U.S. Economy

• Trying to one-up its social-networking rival Facebook Inc., MySpace.com will allow users the option to share their profiles – and the information, pictures, videos, etc. in them – outside the constraints of its Web site and onto sites owned by Yahoo! Inc. (YHOO), eBay Inc. (EBAY), Twitter and Photobucket, Reuters reported. “MySpace no longer operates as an isolated island on the Internet,” MySpace Chief Operating Officer Amit Kapur told Reuters. “The walls are coming down.” MySpace is owned by News Corp. (NWZ).

• News Corp. (NWZ) posted a $2.7 billion profit in its fiscal third quarter, with $1.7 billion of that coming from a stock swap with Liberty Media Corp. Revenue rose 16% to $8.75 billion, just above the average Wall Street forecast of $8.6 billion, Reuters reported.

• Gasoline and crude oil jumped to new records yesterday (Thursday), with gas rising 3 cents to an average national price of nearly $3.65 a gallon and oil crossing $124 a barrel for the first time, the Associated Press reported. Crude oil for June delivery soared to a record high of $123.93 on the New York Mercantile Exchange.

• The U.S. Department of Labor reported yesterday (Thursday) that applications for unemployment benefits fell to 365,000, a decline of 18,000 from the previous week. The Labor Department reported last week that employers cut jobs for a fourth straight month, but the job loss of 20,000 was much smaller than had been expected and was well below the 81,000 jobs lost in March.

• The Economic Commission for Latin America and the Caribbean said yesterday (Thursday) that Latin America attracted a record $106 billion in investments in 2007. Investments rose by 46% over 2006, the Associated Press reported.  Brazil received $34 billion, almost one third of the total regional figure, followed by Mexico with $23 billion and Chile with $14 billion.

• The Bank of England announced yesterday (Thursday) it would leave its key interest rate unchanged at 5%. On the same day, the European Central Bank elected to leave its 4% rate unchanged as well. Economists had expected both banks to pause.

• Aluminum producer Alcoa Inc. (AA) announced Klaus Kleinfeld would replace Alain Belda as Chief Executive Officer, Bloomberg News reported. Belda, 64, will remain on as chairman. Kleinfeld was former chief executive at Siemens AG (SI) and has served as Alcoa Chief Operating Officer since August.

• Barr Pharmaceuticals Inc. (BRL) shed over 20% yesterday (Thursday) to hit a new 52-week intraday low of $37.40. The New Jersey-based generic drugmaker announced first-quarter earnings of $23 million, or 21 cents per share, compared with $12 million, or 11 cents per share for the same period in the prior year, MarketWatch reported. Shares dropped on the earnings report that failed to meet analyst expectations, shedding $11.55 to close at $38.10.

Shortly after the trade data was released, the Labor Department said initial jobless claims came in at 357K and continuing claims rose to 2940K last week. While the initial claims were slightly lower than expected, the numbers still show continued weakness in the employment sector, which will bolster the call for lower rates in the United States. And to finish the data in the United States, we got the ISCS chain store sales, which dropped 0.5% YOY indicating consumers may be starting to tighten their belts.

Again, this data was largely negative for the dollar, so I expected to see a further drop and a move by the euro (EUR) back up to $1.60. But the opposite occurred. The dollar suddenly started to strengthen, and continued a slow climb back up until just after noon CST. The dollar index, which had traded all the way down to 71.30 was suddenly back over 72.

So what caused the big turnaround in the dollar? I searched through the news stories and called a few traders to try and figure out what caused the turn around, but no one seemed to have the answer. When I went home last night, I just figured it had to be a ‘normal’ market correction along with profit taking. But Chuck sent me an email last night with a different idea on the reason for the turn around:

“It sure looks as though the Plunge Protection Team (PPT) was out in force on Thursday, don’t you think? I mean, the dollar had fallen to 1.59 and change, and the Trade Deficit came in $4 billion worse than forecast at $62 billion… And then the next thing we see was the dollar rallying… And rallying hard. Someone with a better answer than my PPT answer is more than welcome to respond…

“As you all know, I was supposed to have dinner last night with my friend, The Mogambo Guru. His wife called me yesterday to cancel… In Mogambo style his wife said to me. ‘The Mogambo must have gotten too excited to meet up with you, he had a heart attack yesterday.’ OH MY GOD! But, Mrs. Mogambo was quick to assure me that he was OK, had a couple of stints put in, and he was already itching to go home… WOW! What a shock!

“So, needless to say, I didn’t have dinner with him last night! And… I’m so glad to hear that he’s OK…

“Don’t you all just love the conviction of the European Central Bank (ECB) and its leader, Trichet? I mean… They have a mandate to provide price stability, and come hell or high water, they are going to follow the mandate! The ECB left rates unchanged yesterday, and President Trichet, talked a tough row to hoe against inflation… Don’t you wish you had someone to watch out for your pocketbook like that? (OK, you do have me… But I’m just a little ol’ Pfennig writer, not some Central Bank President!)

“As I said earlier this week, I fully expect the Fed to cut rates 75 BPS in their next to meetings, which will leave rates here in the U.S. at 1.5%. OK… Now, let’s have the dollar put the recession and low interest rate pants on and walk down the street!

“My time here in St. Pete is up… I’m on my way back home today. The conference was good… There were a lot of new faces in the crowd, and they didn’t get a lot of my dry humor jokes, while speaking… But that’s OK…”

So the PPT was hard at work yesterday; but as usual, their efforts can only support the dollar in the short term. Overnight the dollar went back to its losing ways and dropped again. As Chuck discussed, the ECB left rates unchanged and President Trichet continued to sound hawkish in his press conference. With the euro-region inflation running at the fastest pace in almost 16 years, the ECB is reluctant to follow the FOMC and BOE’s lead. “We believe that the current monetary policy stance will contribute to bringing inflation under control,” Trichet said. “The firm anchoring of medium to longer term inflation expectations is of the highest priority.” You go to love a central banker that knows his role!

Some of the news stories I searched yesterday credited the upcoming G-7 meeting for the quick turn of the dollar. Finance chiefs from the Group of Seven are meeting today to discuss the growing economic credit crisis. The ministers have said they will discuss stronger regulation of the financial markets, but many of the dollar bulls were hoping for a coordinated action to support the sagging dollar. But reports this morning indicate there will be no intervention by the G-7 members as they have been unable to agree on a plan to pull the dollar up. As Chuck has said in the past, these meetings typically do not produce anything concrete, and are usually just a boondoggle for the central bank big-whigs to sit around and discuss just how bad things are in their respective countries while dining on a gourmet meal.

The Group of Seven hasn’t intervened in the currency markets since it supported the euro in 2000. I don’t look for anything that dramatic this time around, and apparently the markets don’t either.

So the dollar will likely continue to drift down today, as the U. of Michigan consumer confidence numbers are expected to weaken. Confidence among U.S. consumers probably sank to a 16-year low this month as unemployment continued to rise along with prices for gasoline and food. The drop in sentiment and in the general wealth of the United States middle class may finally start to weigh on spending. The resilient U.S. consumer has continued to find ways to borrow and spend, keeping the U.S. economy away from a total collapse; but with home prices falling and banks shutting down the ‘free credit’ spigot, consumers are going to have to start pulling in their free spending ways.

So I believe there is much more room for dollar weakness in the next few months. One currency that the dollar had gained on this year has finally started to appreciate again. The South African rand (ZAR) is one of the worst performers this year, falling over 12.5% versus the U.S. dollar since January first. The rand has been hit by a combination of political instability both internally and among its close neighbors. Mining, which is South Africa’s number one industry, had been hit with some strikes and power problems. While these factors are slowly being corrected, South Africa’s central bank raised interest rates to the highest level in almost five years yesterday, which should help bolster the currency. The rand is now headed for a third week of gains versus the U.S. dollar as their interest rate advantage continues to widen. Higher gold prices along with a dramatic interest rate advantage will keep the rand supported, while risk aversion and the accompanying carry trade reversals could put downward pressure on the currency. Which will win out? It will be interesting to see.

Another of the more speculative currencies has had a good couple of trading days as Brazil’s real (BRL) rose for an eighth day on Thursday. The central bank is expected to follow South Africa and increase interest rates next week. The annual inflation rate in Brazil rose to a two-year high of 4.7% in February, and the central bank will likely increase rates to make sure they keep a lid on rising prices. Brazil was the top performing currency versus the U.S. dollar last year, and should benefit from strong commodity prices and interest rate differentials. But like the South African rand, some of the real’s strength is due to the carry trade, which has proven to be incredibly volatile. Both the real and the rand should be seen as speculative investments, and should make up just a portion of your overall currency portfolio.