The dollar rose against the yen on Monday after the Bank of Japan followed last week’s interest rate cut with a warning that the health of Japan’s economy has deteriorated and is likely to get worse.

But investors’ equally dim view of the U.S. economy hurt the greenback against the euro, which rose broadly in holiday-thinned trade. Doubts about whether a U.S. automaker bailout would steer the economy out of recession also hit the dollar.

Traders said volumes were razor-thin in the lead-Up to the Christmas holidays, aggravating even the slightest moves in the currency markets. Still, many said demand for dollars remained low.

“The dollar view is so opaque at the moment, and the risk reward at this time of year is not worth it unless you really have to trade,” said Maurice Pomery, head of foreign exchange at IDEAglobal in London.

The dollar managed to rise above 90 yen for the first time in nearly a week after BoJ Governor Masaaki Shirakawa said yen strength and a global slowdown may force Japanese exports still lower even after a record plunge in November.

“All Asian exporters are at risk in this global economic slowdown, but Japan is at the top of the list,” said Dustin Reid, senior currency strategist at RBS Global Global Banking & Markets in Chicago. “The stronger yen has been playing havoc for Japanese exporters, and the auto companies in particular are likely to be significantly affected.”

So far this year, Japan’s currency is up nearly 20 percent against the dollar and more than 22 percent against the euro.

Early in New York, the dollar was changing hands at 89.85 yen , up 0.8 percent, after earlier rising to 90.23. The BoJ cut Japanese interest rates last week to near zero.

The euro also rose 1.3 percent to 125.79 yen after earlier hitting a session peak of $1.4123. Sterling fell 0.8 percent to $1.4814 , while the euro rose 1.1 percent to 94.35 pence , near a record high of 95.56 pence touched last week.

A move by China’s central bank to cut lending and deposit rates by 27 basis points — its fifth cut since September — shed more light on the scope of the global slump.

GRIM U.S. OUTLOOK

After coming under steady pressure in December, the dollar rallied on Friday after the Washington announced emergency loans for crippled General Motors and Chrysler.

But while the move averted a crisis for now, traders said uncertainty over the companies’ restructuring plans left many doubting the long-term effect it would have on the economy.

Last week, the Federal Reserve cut benchmark interest rates to near zero, underlining the severity of the economic crisis and undermining support for the dollar.

Investors are also looking for the European Central Bank to cut interest rates, currently at 2.5 percent, in January, though ECB executive board member Lorenzo Bini Smaghi warned about the risks of monetary policy being too lax, according to the Rome newspaper Il Messaggero.

Steven C. Johnson, Reuters 12/22/08

Good day…and welcome to another week, hopefully the currency markets can continue their assault on the dollar which began a few weeks ago. The dollar index peaked back on November 21, and with the exception of a few days around the beginning of December, the greenback has consistently fallen vs. most of the major currencies. Friday was no exception, and the dollar continued to give back gains over the weekend with the Euro climbing back over $1.35 for the first time in two months.

This morning the markets are focusing on the Fed’s Open Market Committee meeting and rate announcement which will come tomorrow. It is widely expected that Bernanke and his compatriots will push US interest rates close to just 0.5%, the lowest on records dating back to July 1954. From everything I’ve read over the weekend, this 50 basis point cut is pretty much a done deal, and currency traders are actually more interested in what the Fed’s statement will say about ‘alternative easing measures’. The rate announcement will come tomorrow at around 2:15 pm EST after a two day meeting. The FOMC meeting had originally been scheduled for just one day, but was extended so policy makers could study options for unusual steps to spur the economy. I guess they finally figured out that they are running out of room with the interest rate cuts!

The Feds newest weapon against the falling economy is ‘quantitative easing’, which the Bank of Japan used in the 1990’s. This non-traditional method of easing centers around pumping money back into the financial markets as quickly as possible. The Fed has already started down this path by allowing its balance sheet to more than double in size after pumping over $1 trillion into financial markets. The markets are now expecting the Fed to announce it will start purchasing private sector mortgages to drive down home loan costs. By purchasing these bonds, the Fed would narrow the spread between their yields and yields on US Treasuries, and theoretically allowing banks to offer home loans at lower rates.

But the Fed has already pumped trillions into the banks in an effort to get them to start lending, so I’m not sure having the Fed narrow mortgage spreads will get these same banks to open up their lending windows. And even if the banks lower mortgage rates, they won’t be lowering credit standards. Unemployment continues to rocket upward as more and more firms lay off workers. Do you think these banks are going to be willing to refinance someone who has just lost their job?

And what will be the long term impact of all of this ‘quantitative easing’? The Fed is mashing on the money supply accelerator, totally ignoring the inflationary results which all of this will bring down the road. Ben Bernanke is smart enough to know the risks of the path he is speeding down, but right now he is choosing to ignore the consequences in an attempt to keep the economy from falling off the abyss. Some at the Fed believe they will be able to pull all of this added liquidity back out of the markets as soon as the economy starts to recover. But this is a very difficult thing to do, as the Fed would have to start pulling liquidity and increasing rates just as the economy is starting to turn. I think it is pretty obvious the ‘experts’ have a tough time calling the turning points, as it took them almost a year to call the recession!! And the consequence of missing the timing on pulling the liquidity back out of the market is much more drastic than mistiming the entry into the recession. Hyperinflation is waiting on the other side of this short term deflationary pause, and the Fed is currently looking the other way.

This weekend, President Bush announced that he is thinking about spending some of the TARP money which was set aside to stabilize the financial system to bail out the auto industry. This announcement caused a further sell off of the dollar as it is quickly losing its status as a safe-haven currency. Chuck was busy this weekend, but still found time to send me his thoughts:

“Well… We went to cut down our tree today, then watched Alex’s basketball team get smoked! Put the tree up in a spiffy, with one of the greatest inventions of man kind, the swivel stand… And now I’m off to tell you what I’ve read about this weekend…

First though… A quote from Ronald Reagan… “The most terrifying words in the English language are: I’m from the government and I’m here to help”

OK, with that in mind, I wanted to discuss the bailout for the automakers, GM and Chrysler.

First of all, I know it will be tough for the autoworkers should they be laid off, especially at this time of the year. But, the problem here is the fact that the automakers have run their respective companies very badly, and now they expect the taxpayer to bail them out.

It was reported on Friday that the Gov’t is “looking into” using TARP money for the automakers bailout since the Senate voted “no” to the $14 Billion plan.

First of all… Congress said nothing about helping carmakers, or any other non-financial business, in October when it authorized the $700 billion Troubled Asset Relief Program, or TARP. But yet, it is being discussed as the “funding source of funds”…

That fund was never designed to rescue manufacturing companies with long-term operational issues. It was designed to shore up confidence in the banking system in order to thaw the world’s credit markets.

Our own David Nicklaus of the St. Louis Post Dispatch has this to say, which makes a whole lot of sense to me! “The Detroit Three have been losing market share for decades, and their bloated cost structure makes it difficult for them to turn a profit even in good times. They have too much debt, too many models, too many dealers and, sad to say, too many workers.

Congress seemed to view an auto bailout as a jobs program, and TARP is nothing of the sort. In fact, the Treasury has invested in Bank of America, which is eliminating 35,000 jobs, and Citigroup, which is slashing 52,000.

The Treasury program, as it’s been used so far, at least lacks one of the worst features of the failed auto bill. Nothing in the TARP legislation allows the government to name a car czar.”

Yes, a Car Czar… Those Czars worked out well for the Russians, eh?

But the thing that really gets my blood boiling folks, is the fact that if bailout had gone through with the Car Czar, it would have been one more nail in the free markets / business coffin, just another opportunity for those that want to run the country toward the socialist side of the ledger…”

That is one of the things I love about Chuck, you don’t ever have to wonder where he stands on something!

As I started to say before I went off on my FOMC tangent, the dollar continued to give back ground vs. just about all of the major currencies over the weekend. The Euro was up over 1.2% vs. the dollar, and broke through the $1.35 handle. The only two currencies which sold off over the weekend were the South African rand and Brazilian real, which were down just slightly. In addition to the FOMC meeting and announcement, we will get the TIC flows, Empire manufacturing number, Industrial Production, and Capacity Utilization numbers today. Tomorrow will bring the CPI numbers along with housing starts, building permits, and ABC Consumer confidence. Wednesday will be a light data day with just the Current Account Balance reported, and Thursday will close out the data with the weekly jobs numbers along with Leading indicators.

The Australian and New Zealand dollars rose on speculation the FOMC will be cutting US interest rates. These two currencies will benefit from their higher rates with the US cutting rates to near zero. The currency markets have started to move back toward trading on fundamentals over the past few weeks, and interest rate differentials are one fundamental which favors the NZD and AUD. If the Fed’s statement makes it known that interest rates will remain low for a long time, the dollar would likely fall further vs. the Aussie dollar, as the RBA has signaled that it is close to the end of its rate cutting cycle. Benchmark rates are nearly 400 basis points higher in Australia and New Zealand when compared with the same rates here in the US.

In a break with the recent trading pattern, the Japanese yen rallied along with the New Zealand and Australian dollars. A former Deputy Governor of the BOJ said Japan is probably not going to lower rates further; “with the interest rate already so low, a further reduction would have only limited impact.” The central bank’s Tankan survey today showed confidence among large manufacturers fell the most in 34 years as a deepening global financial crisis crimped export demand, forcing companies to pare production and fire workers. The yen’s recent surge to a 13 year high has compounded woes for manufacturers.

Gold continued to rise over the weekend, pushing back up to an eight week high in London. The dollar’s fall has spurred investors to move back into gold as an alternative investment. News that President Bush was looking to tap the bank bailout fund to keep GM and Chrysler out of bankruptcy spurred further purchases of gold. With the tremendous growth in the US money supply, and the FOMC turning their back on inflation concerns, precious metals should continue to gain ground. Gold is traditionally one of the best hedges against rising inflation.

Currencies today 12/15/08: A$ .6635, kiwi .5523, C$ .8138, euro 1.3473, sterling 1.4969, Swiss .8534, ISK 218, rand 10.1985 krone 6.9051, SEK 7.9963, forint 197.97, zloty 2.9644, koruna 19.428, yen 90.79, baht 34.88, sing 1.4773, HKD 7.75, INR 48.0512, China 6.85, pesos 13.5138, BRL 2.387, dollar index 83.15, Oil $48.52, Silver $10.36, and Gold… $827.60

Source: Waiting on the FOMC Meeting

But the forthcoming closure of a Chrysler plant in Chuck’s home town underscores his belief in the benefits of diversification…

Profit Taking Dominates the Day

By Chuck Butler

Eli Broad, the Billionaire investor, says that the “U.S. economy is in the worst period of his adult life and that a housing market recovery remains several years away.”

I agree… The 70’s were pretty rotten in my memory, except for the music, (pre-disco), even the clothes were pretty bad… But at least as a country we were still a creditor nation, and we as individuals were “savers”… The money & credit creation machines hadn’t even been thought of yet! We were fighting a war… Same as now… Inflation was everywhere… Same as now… There are lots of similarities to that rotten decade, with the Deficit problem and credit problem sticking out like sore thumb as differences.

Yesterday, the Chicago PMI (manufacturing index) surprised on the upside, but was offset by a weaker Milwaukee performance. Today, we’ll see the ISM, national pulse of manufacturing, which should remain below the line in the sand, 50 number. Below 50 indicates contraction… And that’s where manufacturing has been for months now, which is what initially led me to believe we were in a recession, even though most economists still don’t consider this to be a recession… I still say that when the dust settles and all the cards have been played, the National Board of Economic Research (NBER), the people that decide when we WERE in a recession, will confirm my claims… That’s the sad part of the deal though… The NBER tells us about recessions after we’ve experienced them! Great! That’s sort of like having someone tell you that you have a hatchet in your forehead… No duh!
And more bad news for the U.S. economy. Yesterday, Chrysler announced that they were going to shut down the mini-van plant in my little river town… That’s a ton of jobs that will be gone… Speaking of my little river town… Years ago, I was an elected official of that town… And I fought for diversification of our revenues, which at the time was dominated by the Chrysler plant… My town is now ready for this loss of revenue, not that it will like it! But diversification! See… It’s the key not only in your investment portfolio, but with city revenues!

Source: Profit Taking Dominates The Day