Strength in the U.S. unit kept most dollar-priced commodities under pressure as it made them more expensive for holders of other currencies, analysts said.

Spot gold was bid at $921.20 an ounce at 1507 GMT, against $932.30 an ounce late in New York on Friday.

U.S. gold futures for August delivery on the COMEX division of the New York Mercantile Exchange fell $9.70 from Thursday’s close to $921.30 an ounce.

“There is a sell-off with the dollar strength,” said Standard Bank analyst Walter de Wet. “Gold is holding up quite well, compared to the other commodities. At these levels, we might see some physical buying.”

He said while this may lend support to prices, a break of the $920-922 level could lead to a retracement back to $900.

The dollar, along with the yen, gained broadly on Monday amid fears over the economic outlook, which led investors to shun riskier assets in favour of currencies perceived to be safe.

Investor confidence across the market has been subdued since weaker than expected jobs data from the United States last week. While gold often benefits from uncertainty in the wider markets, it is currently taking its cues chiefly from the dollar.

Traders are awaiting fresh direction from the outcome of the G8 meeting later in the week.

“The market will certainly be cautious ahead of the G8, (and) that nervousness could further limit the metal in the range,” said Pradeep Unni, senior trader at Richcomm Global Services.

“It’s ideal to be on the selling side, and the slide in oil prices may keep the prices subdued.”

PROSPECTS

Oil fell to below $65 a barrel on Monday, having touched a five-week low earlier in the session, pressured by doubts over prospects for a recovery in the global economy and energy demand.

Other industrial commodities such as copper and aluminium also fell.

Elsewhere, the Bombay Bullion Association said demand for gold and silver from India, the world’s biggest bullion consumer, is likely to be pressured further this year by an increase in import duty in the budget for 2009/10.

“As it is, business was bad,” said the association’s head, Suresh Hundia. “This will make it worse.” Indian gold imports tailed off last year as prices rose.

Bargain hunters emerged in India as prices fell on Monday, but other Asian buyers are awaiting a further price correction, dealers said.

Among other precious metals, silver tracked gold lower, falling to a near nine-week low of $13.00. It was later at $13.21 an ounce against $13.39.

“Interestingly, the gold to silver ratio surged higher in the past week, pushing above 69 on Friday,” VTB Capital analyst Andrey Kryuchenkov said in a note.

“Gold prices were almost unchanged in volatile trading last week. However, silver suffered not only from weakness on the (platinum) market, but also from a slight increase in risk aversion and resurfacing economic concerns.”

Platinum eased to a low of $1,138.50 an ounce, its weakest since late May, before recovering to $1,142.00 an ounce against $1,185.00, while palladium was at $241.50 against $248.50.

LONDON, July 6 (Reuters)

Spot gold dropped to $925.60 an ounce at 1207 GMT, having earlier hit a intraday low of $921.30. That compared with $933.80 quoted late on Friday in New York. The price was fixed or set in London earlier on Monday at $924.00.

The dollar gained at the expense of higher-yielders normally associated with risk seeking behaviour, reflecting investor concern about global growth prospects and jitters ahead of the U.S. Federal Reserve’s rate setting meeting — a factor that was seen supporting gold at the lower levels.

“This whole rebound in sentiment has run into concerns over the extent of real improvement in the economy,” Calyon analyst Robin Bhar said.

“I don’t really see too much more downward movement (in gold) from here, as physical demand will reappear at these levels.”

The Fed was not expected to adjust monetary policy at its meeting this week, but investors will keep a keen eye on its statement for clues on the economic outlook and progress of its debt buyback programme.

In early June, a weakening dollar and increasing demand for gold-backed funds helped bullion hit a three-month high of $989.80 an ounce. But the dollar has since pared its losses, dulling some of gold’s allure as an alternative investment.

Easing crude prices also helped diminish appetite for gold as a hedge against oil-induced inflationary concerns.

INVESTMENT TAILS OFF

In other metals, silver followed gold lower , falling to $13.83 from $14.19 late on Friday in New York. Platinum was bid at $1,188.50 per ounce , while palladium stood at $239 .

Gold’s three-week decline, partly due to selling related to the unwinding of long positions in U.S. gold futures, has discouraged fresh buying, traders said.

U.S. gold futures for August delivery fell 1 percent to $926.70 per ounce from Friday’s settlement on the COMEX division of the New York Mercantile Exchange.

A weekly report by the U.S. Commodity Futures Trading Commission showed noncommercial net long U.S. gold futures positions fell 7.5 percent to 175,543 lots in the week to June 16 from 189,674 lots the week before .

The world’s largest gold-backed exchange-traded fund, the SPDR Gold Trust (GLD), said its holdings stood at 1,132.15 tonnes as of June 19, unchanged since June 5.

ETF Securities also said on Monday the amount of gold it holds to back its Gold Bullion Securities exchange-traded commodity fell around 45,000 ounces on June 19.

Investors are in a period of re-adjustment, analysts said, as earlier bets on riskier assets including global share markets  may been overdone in light of persistent global growth concerns.

“Anyone expecting a rapid v-shaped recovery is in for a bit of a disappointment,” said Simon Weeks, director, precious metals sales at Scotia Mocatta in London.

LONDON, June 22 (Reuters)

There’s always a bull market somewhere, the cliche goes. Today — and so far in 2009 — Shanghai’s been a surprisingly good spot to place your bets.

The Shanghai Composite climbed another 6% yesterday. Rumor has it the Chinese government is considering doubling its own economic “stimulus” package, from around $580 billion to $1 trillion… maybe more.

There are a couple data points being published lately that have traders excited. The Chinese purchasing managers’ index, for example, rose to 49 in February, just a hair short of the contraction/growth score of 50 and an improvement from November’s record-low score of 38.

The Chinese sovereign wealth fund has been pumping money into its biggest banks, too. And with the fall of financial giants here in the U.S., those Chinese banks are becoming, umn, relevant. Middle-class demand for goods and housing, while slowed, is still growing.

A record 20% of all U.S. residential mortgages were “underwater” in December. That means more than 8.3 million mortgages carried more debt than the value of the home they were borrowed against. The “sand states” — California, Nevada, Arizona and Florida — have it worst. For example, 50% of all Nevada mortgages were underwater in the last month of the year.

“The accelerating share of negative equity, combined with deteriorating economic conditions, means that mortgage risk will continue to increase until home prices and the economy begin to stabilize,” said Mark Fleming, chief economist of First American CoreLogic, which published the survey. No word on what happens if they don’t.

Private American companies shed 697,000 jobs in February, ADP claims today. The payroll management company’s gauge of monthly employment registered 83,000 more schlubs kicked to the curb than the Street expected… and marks the 14th straight month of decline.

The Bureau of Labor Statistics (BLS) is expected to announce 650,000 job losses in February. If ADP’s report is any indicator (and that’s a big “if”), Friday’s BLS report will be worse than expected as well.

Regardless of the accuracy of either report, you can get a pretty fair look at the employment scene by charting both. Look very closely and you might spot a trend.

Even we’re getting bummed out by these numbers.

Doing its part, the U.S. auto industry had its worst month in 27 years during February. Sales crashed 41% year over year, to an annual pace of “just” 9.1 million. That’s the slowest pace since 1981… amazing, especially considering there were around 75 million fewer Americans back then.

A year ago, yearly sales exceeded 15 million cars and trucks.

Tired of driving their own hybrids to Washington, GM execs are now pleading with European governments for bailout bucks over the phone. The degenerates’ case: Without a multibillion-dollar boost, up to 300,000 Europeans will lose their jobs when GM’s EU plants run out of money. Hmmn… that sounds familiar, doesn’t it?

GM is asking Germany for $4 billion in exchange for partial ownership of European operations. The FT says the automaker is also in talks with the U.K., Spain and Poland. Just what the global economy needs, eh? A global shakedown.

The stock markets opened decidedly higher this morning. After stumbling to a small loss yesterday, the Dow popped up 100 points at the opening bell today… for… umm… no real reason at all. Other than this curious sound bite:

“What you’re now seeing is profit and earning ratios starting to get to the point where buying stocks is a potentially good deal,” newly elected president turned financial adviser Barack Obama said yesterday, “if you’ve got a long-term perspective on it.”

Here’s a question: How many of the retiring baby boomers with gutted portfolios and bitch-slapped pension plans have a long-term perspective “on it”? Solid, like Barack.

“We are quite confident,” added Fed head Ben Bernanke yesterday before Congress, “that we can raise interest rates, reduce the money supply and do that all in a timely way to avoid any inflationary consequences.”

The chairman marched to Capitol Hill yesterday to defend his multitrillion-dollar campaign to save us from ourselves. He insisted that he “had no choice” but to bailout AIG, and soothed lawmakers with assurances like this: “If there’s a single episode in this entire 18 months that has made me more angry, I can’t think of one other than AIG.”

Grr…

And as the Fed chairman massaged Congress with one hand, the other quietly orchestrated the first day of the Term Asset-Backed Securities Loan Facility (TALF). (That sounds dirty, doesn’t it?)

Between his printed dollars and taxpayer dough lent from the Treasury, the program to rekindle student, auto, credit card and eventually mortgage loans will have a war chest exceeding $1 trillion.

“The question facing every investor today,” writes Eric Fry, “and the one that could wield a very large influence over one’s investment fortunes — is whether deflation or inflation will hold sway during the next couple of years.

“To preview our conclusions: We’re betting on inflation.

“No one knows, least of all Ben Bernanke or Timothy Geithner, if the Fed will conjure up one dollar too many. And no one knows if the Fed could ever coax its magical deflation-fighting dollars back into the cauldron, once their services were no longer needed.

“At least, in theory, no one knows…

“In reality, everyone knows: The excess dollars will never return to the cauldron. They will escape into the economy at large, where they will run rampant, and cause the price of eggs to increase to $10 a dozen…or $20…or maybe even $100…

“And what if inflation arrives much sooner than expected? What if the widely anticipated deflation never materializes? The holders of long-dated Treasuries would fare very, very poorly. And the nonbuyers of gold would be very chagrined, at best. So consider this two-part question:

“1) Is the 2.89% yield of a 10-year Treasury so thoroughly compelling that it justifies risking an enormous capital loss (if inflation appears sooner than expected)?

“2) Are commodity plays at their current depressed quotes so thoroughly risky investors should continue to shun them, no matter the price?”

Oil has snapped back $3, to $44 a barrel. Most of the buying support today comes from the Far East, as the latest momentum from China gives traders hope that the world’s second biggest user of the gooey black stuff is still guzzling away.

But gold isn’t getting any love today. The spot price fell another couple bucks overnight, now at $910 an ounce.

“The monetary and banking problems driving gold higher for months have not disappeared,” James Turk assures us. “They will remain for the foreseeable future because the imprudent lending by banks will take years to unravel, highlighting the essential need for a safe haven for one’s money.

“Gold is the safest of safe havens because it does not have counterparty risk. Gold also preserves purchasing power, which is an attribute that will become increasingly important in the months ahead as all the new money being printed by central banks around the world takes its inflationary toll.

“Gold has not yet made a new record high in U.S. dollars, but I expect one soon.”

After hitting a fresh three-year high yesterday, the dollar index is still holding strong today. It scores just under 89.

“I get asked all the time,” notes EverBank’s Chuck Butler, “how long will this dollar strength last. I said some time ago that I believed that by late summer/early spring, the credit markets might be showing signs of unlocking, and that could bring the risk takers back out from under their respective rocks, and that a return to the fundamentals would bring about an end to the dollar strength. The end of July marks one year of dollar strength, when the you-know-what hit the fan with subprime loans and this whole lockdown of credit and liquidity caused a huge deleveraging in the markets.

“While I still believe this thought has merit, I also have to figure in the fact that the previous stimulus plans didn’t work, the money was wasted on Wall Street buddies and cronies… And now we need another one, but only this new one is centered on the wrong things. So I’ll be watching for signs. If none appears, then I’ll have to go back to the drawing board.

“So in an environment when ‘bad news’ rewards the dollar… and the bad news just keeps coming along, that’s not a good sign for a reversal of dollar strength right now. When what used to be called 100-year events now happen almost weekly.”

“The reader commenting that the best thing for China, et al., to do,” writes our first reader today, “would be to cut Americans off from funding and provide tough love may be missing a big implication. If an unreformed alcoholic is TOLD to stop drinking and his bottle is forcibly removed, do they graciously thank you or come up swinging?

“I believe that if America had its funding removed, we would be fighting World War III within weeks. Ever better to maintain the facade BUT take advantage of opportunities within the charade.”

“If I have time to read only one of the many, many e-letters that I get daily,” writes another reader, ”The 5 is that one. Keep up the great work!”

“Many thanks for continuing the best daily read around anywhere,” says a third.

And a fourth: “You guys are the best…love your timely and wisdom-filled 5 Min. letter.”

“Thank you!” writes a fifth. “Your ongoing thoughts on the markets are ALL excellent, even the ones I don’t agree with. Your thoughts make me think, and sometimes differently to my original thoughts.”

The 5: Thank you! You’ve always been gracious to The 5, but lately, we’ve been getting an awful lot of one-line thank you notes. We’re starting to get suspicious. How about some criticism? If there’s anything you think we’ve been missing or would like to see more of in our daily digest, by all means… let us have it: 5minforecast@agorafinancial.com

And seriously, thanks for reading. It’s our pleasure.

China Bucks the Trend, GM Goes to Europe, Inflation Prediction, Jobs and More!

For the first time in a long time, we can tell you today that the U.S. stock market is up year to date:

The major indexes rang in the new year with a 3% rally on Friday — the best first day of a new year in the last six. And a sharp contrast to 2008, when the Dow had its worst opening day since 1983.

To accomplish that feat, the market shrugged off the only piece of data worth noting… the Institute for Supply Management (ISM) manufacturing survey started off the new year at a new 28-year low.

We have to say we love the financial media chatter on this first business day of the penultimate year of the first decade of the new millennium. On the one hand, the president-elect is promising a $300 billion tax cut to accompany the now $775 billion stimulus package working its way through Congress.

On the other hand, a consortium of state governors are calling for Obama to expand his rescue package to over $1 trillion. Leaders of New York, New Jersey, Massachusetts, Ohio and Wisconsin petitioned the president-to-be Friday for around 300 billion extra bailout bucks, mostly to help offset state budget shortfalls.

Meanwhile, 40% of government debt held by public investors will mature in the next 12 months… roughly $2.5 trillion. Meaning they’ll have to roll it over at whatever rate the market will bear at the time.

“It’s curious,” one reader wrote, capturing our mystification over the weekend, “that full-grown adults are willing to bet their lives on a new medicine because it worked on 2-ounce mouse, yet they can’t believe that what happened in a ‘tiny’ economy such as a Zimbabwe or an Iceland can happen in a big economy like the United States.”

Happy New Year!

“Investors will initially welcome the promise of fiscal stimulus from the incoming administration,” writes Rob Parenteau, steward of The Richebacher Letter, “before realizing the nature of the challenge ahead. If Dr. Richebacher was correct in his assessment, nothing less than the entire global production structure needs to be reoriented.

“Asian production results point to a depression developing in that region. And the world is starting to realize it can no longer rely on serial asset bubbles and credit-financed consumption. But the apparent solution — so far — is for countries around the globe to reach for an increased public sector role in the economy. We are beginning to see hints of protectionism, as well. As the old regime breaks down, this is the solution developing before us… by accident.

“We sincerely doubt Dr. Richebacher would see public deficit spending and protectionism as a road back to sustainable economic growth. Rather, we would vastly prefer to see a rebalancing of the global production structure and a simplification of finance. Asian nations must become more domestic demand driven. And the Anglo-American nations, in particular, must save and reinvest earnings in tangible capital equipment, rather than mergers or stock buybacks. That is clearly a longer-term project requiring adequate changes in prices, incentives, income and capital, but it is a project he repeatedly championed for the length of his career.

“In the meantime, desperate fiscal and monetary measures around the globe during 2009 may help cushion the nightmarish blow wrought by the failure of the old global economic and financial arrangements. But they are unlikely to be a sound basis for the next leg of growth.”

“2009 should be a year,” Dan Amoss comments further, “when fundamental analysis should start to matter once more. That will be a welcome development, because 2008 was a year when the following strategy worked best:

1) Sell short any stock or ETF, without bothering to do any fundamental research
2) Invest the proceeds in Treasury bonds, preferably with as much margin as possible
3) Repeat Steps 1 and 2, over and over.

“Clearly, this ‘deflation trade’ strategy is not sustainable over longer time frames — not in an era of worldwide paper money standards. In fact, I’d expect that such a shotgun-based investment strategy of short S&P 500/long Treasuries could lead to big losses in 2009.

“The economy will remain weak, but I think the worst of the widespread market carnage is behind us. Future damage should be concentrated in sectors with horrible fundamentals.”

But for now, investors are happy to bid stocks up… AND buy the dollar. The dollar index is up a point and a half from Friday, to around 83 this morning, heading thus far in the direction of its credit crisis high of 88.4 set on Nov. 21, 2008.

“The dollar is kicking up its heels once again,” writes EverBank’s Chuck Butler, “and this is to be expected during this Obama bounce. The markets are swayed by the smooth-talking President-elect’s call for $300 billion in tax cuts, a job creation program and (possible) $1 trillion economic stimulus package.

“But all these things cost money, lots of money, and money we don’t have, unless… we just go and print more. This is why I believe that once all the euphoria of the Obama presidency has run its course, the markets will do a V8 slap to the forehead and realize we’ve just dug ourselves a deeper hole!”

Gold hasn’t been too pleased with the dollar’s uppityness. In fact, she’s downright depressed. The spot price fell $30 over the weekend… below $850 an ounce this morning.

“In 2009,” forecasts Ed Bugos, keeping his eye on her meds, “economic conditions will deteriorate. Unemployment will reach double-digit rates before the year is out.

“As the year wears on and investors sort out the fallout of 2008, I believe that there will be fewer plausible investment alternatives to gold, and that markets will begin to realize the errors of the government’s current policy. The big winners in all this will be gold shares, which will perform better than gold, as they have been absolutely cheapened beyond belief, and risk premiums fall.”

Despite dollar strength, oil has greeted the new year with glee. Light sweet crude jumped 23% last week. In dollar terms, that’s nearly a $9 leap, to $48 this morning.

Last week was the black goo’s biggest since August 1986, after… hmn… a global equity rally and strife in Gaza.

Mortgage rates have pickled to at least a 37-year low. The average 30-year fixed loan went for 5.1% last week, Freddie Mac reports, which is the lowest since the company started keeping track in 1971.

No surprise, then, mortgage applications are at a five-year high. Mortgage application activity stayed around 1,200 last week, the Mortgage Bankers Association said. That’s the most weekly apps since July 2003.

But these historically low rates and the surge in mortgage applications aren’t doing diddly for the housing market. 83% of all applications recorded last week were for existing homes. And why not? If you can lock in for 30 years at or near 5%… go for it.

Meanwhile, the next leg of the real estate bust is already coming down. In nearly every major city, 10% of office buildings are now vacant.

“Virtually every market in the country will see a rise in vacancy rates of between 2-5% by mid-2009,” Bill Goade, head of CresaPartners, told The New York Times this morning. According to a report by Real Capital Analytics, an estimated $400 billion worth of commercial real estate loans come due this year, $107 billion of which are already delinquent.

Of course, you can leave it to Wall Street to make matters worse. Approximately 60% of all commercial property loans made in 2006-2007 were securitized into the same kinds of debt tranches and CDOs that set the credit crisis in motion in July 2007.

The banks sitting on them now? They rank among the only firms to escape calamity in 2008. Bank of America, J.P. Morgan and Morgan Stanley hold “tens of billions of dollars” worth of the stuff — each.

Oy.

“Imagine my surprise,” writes a reader headlining a smattering of random e-mails we received over the weekend, “upon finding the following clue in the Sunday crossword puzzle of The Miami Herald: ‘2 down: 2008 documentary about the national debt’

“It has a lot of vowels, so I predict I.O.U.S.A. will be the answer to many crossword questions for years to come. Would you have predicted a development like this for your film in your wildest dreams? What a country!”

The 5: Amen. And… we have an ‘in.’ The Miami Herald picked up The New York Times crossword puzzle from the week before. Will Shortz, the editor of The New York Times puzzle, played the role of lead protagonists in Patrick and Christine’s first film, Wordplay.

By the way, the Critics’ Choice Awards will be announced this week. After we published the link for audience votes , we blew the survey to pieces. At one point, we had over 80% of the votes. The only other movie or actor to get reviews similar was Heath Ledger for Best Actor, who clocked in at about 84%. The Dark Knight was up there too.

It’s all absurd, of course, but kind of entertaining to check out. You can do so here. There are a bunch of reader comments on the site too.

“It seems to be going on under the radar,” writes another reader, on a completely unrelated subject, “but there has been some serious buying action in the uranium miners since Obama was elected. Maybe these people think (or know) that uranium will be the new Green in 2009?”

The 5: We suspected as much as well… on Wednesday.

Source: New Year Rally, Obama’s Plan, Shorting in 2009, The Second Wave of the Housing Bust, and More!

Gold prices slipped 1 percent on Tuesday, failing to hold earlier gains, as the stronger dollar versus the euro weighed on prices.

The precious metal ticked higher in earlier trade as a healthier tone to the equity markets boosted prices. However, dollar strength pushed it back into negative territory.

Spot gold was quoted at $767.50/769.50 an ounce at 1426 GMT, off a low of $761.80 but down from $771.30 late in New York on Monday. Earlier it touched a session high of $776.45.

U.S. gold futures for February delivery slipped 90 cents or 0.12 percent to $768.40 an ounce.

“The euro came off a bit (versus the dollar) and gold is following suit,” said Afshin Nabavi, head of trading at MKS Finance in Geneva.

“It is a very quiet week, with most of the Middle East closed throughout the week and a lot of the Far Eastern countries also on holiday,” he added. “There has been very low volume in the last couple of days.”

The dollar gained against the euro as risk appetite waned, with investors focusing their attention on the dire outlook for the global economy.

The precious metal is often bought as an alternative investment to the U.S. currency and moves in the opposite direction to it.

The euro suffered as the main reading of the German ZEW economic sentiment index for December came in better than expected, but the current conditions component showed a larger than expected deterioration in the euro zone’s biggest economy.

The other main external driver of gold, the price of oil, also slipped on Tuesday at just over $43 a barrel.

The market is awaiting a demand report from the U.S. energy department later in the session and the production meeting next week of the Organization of the Petroleum Exporting Countries (OPEC) for signs of the next direction of trade.

Falling crude prices can undermine confidence in commodities as an asset class, and dent interest in gold as a hedge against oil-led inflation.

However firmer stock markets are providing some support for prices. The pan-European FTSEurofirst 300 <.FTEU3> index rose 1.2 percent, reversing earlier losses.

The European Central Bank said gold and gold receivables held by euro zone central banks fell by 42 million euros in the week ending December 5.

PLATINUM WILTS

Among the other precious metals, platinum slipped a touch as investors worried slowing economic activity would hit demand for the metal, which is chiefly used to make catalytic converters.

Economic news was weak on Tuesday. Data showed Japan’s economy contracted at a faster pace than anticipated in the third quarter, while British industrial output fell at its sharpest pace in nearly six years in October.

A survey from the Organisation for Economic Coperationa and Development (OECD) also said the U.S. economy will probably get worse before it gets better. [ID:nL9125400]

News on Monday of developments in U.S. government plans to bail out ailing carmakers boosted the precious metal that session, but the fillip was short-lived.

“We would still exercise caution in the current environment, particularly since there is a risk that the package would be viewed as simply a short-term solution that does not resolve the underlying problem,” said Barclays Capital analysts in a note.

Spot platinum eased to $800/820 an ounce from $821 late in New York on Monday, while palladium was steady at $173/178 an ounce from $173.

Spot silver was quoted at $9.76/9.84 an ounce against $9.95.

Jan Harvey

LONDON, Dec 9 (Reuters)

This from Investment U:

Recall, in late March I predicted here the dollar was overdue for a rally. Ninety-six percent of you cursed me. The other 4% pocketed an easy 20% or so (more if you played the options market).

But after such a swift run – mind you similar moves in currencies typically take years, not months – is the dollar rally finally coming unhinged?

Legendary investor Jim Rogers seems to think so…

As he told Bloomberg News in a TV interview, he plans to exit his dollar holdings because he thinks the dollar “will go down a lot” and it is “going to lose its status as the world’s reserve currency.”

To which I simply respond, “Into what Jimbo?”

No other choice for a reserve currency exists. No matter how much other governments wish it were so.

The euro is frequently mentioned. But it’s depreciating in value. And there’s not enough liquidity to handle the demand. Plus, it’s still a prepubescent, experimental currency, not one governments can invest in with 100% faith.

Moreover, with two-thirds of foreign reserves already in dollars, it would take more than eight years to replace the dollar as the currency of choice.

So once again, I’m striking out on my own. (And I’m ready for the flood of fan e-mails.) While many pundits would like you to believe that the dollar rally will be short-lived, I completely disagree.

The dollar’s not done.

Today I offer up three more reasons why. And of course, three ways to play it…

Too Far, Too Fast? Hardly…

Keep in mind, currency rallies tend to be measured in years and months. Not weeks and days. In fact, according to Bespoke Investment Group, the average dollar rally lasts 489 calendar days. The longest rally on record lasted roughly 10 years.

While I don’t think we’re in store for a historic run this time, I do think the current rally has more legs (about another year based on the averages out of Bespoke).

Aside from no alternative world reserve currency, here are three more fundamentals in defense of the dollar:

Further Interest Rate Cuts
Foreign governments bought into the farce that was decoupling. As a result, they remained hawkish for way too long, keeping interest rates too high, at a time when they should have been cutting them to stimulate growth. And now they’re scrambling to catch up. They must make growth their first priority. So further interest rates cuts are inevitable, narrowing the gap with U.S. interest rates. And before long, perhaps the middle of 2009, we could be raising rates while other countries are still lowering.

Continued Deleveraging
As Mark Astley, CEO of Millennium Global Investments, a U.K.-based currency manager notes, “there is a pyramid of leverage” in the financial markets that will take considerable time to unwind. The half-frozen credit markets are only slowing down the process. As they thaw out completely, expect hedge funds and foreign banks to keep buying up dollars.

Uncertainty Reigns
Despite a new president, uncertainty remains in the markets. Or as UniCredit wrote in a recent research note, “We do not expect global recession fears to wane considerably.” And during times of fear and risk aversion, the dollar tends to outperform.

Bottom line, the current rally has plenty of room to run. If you dare to be contrarian, here’s how I recommend you play it…

Consider Pure Plays
For a pure play on the U.S. dollar – without trading the currency markets – I recommend the PowerShares DB US Dollar Bullish Fund (AMEX: UUP). It’s designed to replicate the performance of being long the greenback against the euro, Japanese yen, British pound, Canadian dollar, Swedish krona and Swiss franc.

Another strong choice is the EverBank* DollarBull CD. Available in 3-, 6-, 9- and 12-month terms, it offers potential appreciation in the U.S. dollar against a selected foreign currency. If you opt for the latter, I recommend going long the U.S. dollar versus the euro.

Take Profits on Unhedged Multinationals
Consider taking profits in multinationals with significant foreign currency exposure. I say that because the rapidly strengthening dollar will dent future earnings in two major ways. First, because profits earned abroad will be worth less, as they’re translated back into dollars. Second, because demand for the company’s products will drop off, as they will be more expensive to foreign buyers. We’re already seeing this double-whammy hurt third-quarter results for some big multinationals. But if the dollar holds its ground, or strengthens further, the impact will be much more dramatic in the fourth quarter. So get out while you’re ahead.

Buy American
While the dollar was plummeting it made sense to buy companies with significant international sales. They provided a nice currency hedge. However, a strong dollar means we need to reverse course and seek out companies with zero (or minimal) international revenues. I’d stick to solid companies in the utility, health care and consumer staples industries, as demand will remain steady no matter how long the recession lasts.

In the end, I know my dollar stance is contrarian. Or as many of you put it last time, “ignorant” and “completely out of touch.”

I’d add “profitable” to that list now. And I don’t expect this time to be any different.

Source: Jim Rogers is Wrong… The Dollar’s Not Done

This will be the end of another of the things that’s keeping the fundamentals in the back of the classroom. All we’ll have left is the credit squeeze… Unfortunately though I feel like we’re going to have to live with that one for some time to come! There are signs that things are loosening up, but it’s a far cry from what should be considered as “normal” in the lending arena! As long as the credit squeeze remains in place and on the minds of traders & investors everywhere, we’re stuck with the Trading Theme of 2008… Well, let’s see, it didn’t come into play until late July, so it should be called the Trading Theme of late 2008 and 2009.

That’s right folks… When I first saw this all unfolding in July and August, I told you in this letter that this dollar strength could very well last through the elections and through to year-end… That was before the rot on the vine was exposed in September and October… Now, I fear that this will be the Trading Theme for most of 2009 too… As the Credit squeeze continues to hang over the markets like the Sword of Damocles. And… Someone told me that in 6 out of the last 7 elections, regardless of whether the Democrats or Republicans won, the dollar rallied in the 6 months following the election. So…. That takes us into 2009, with the Trading Theme and credit market squeeze… It all adds up…

And as long as I’m going down this road of bad news… I have come to a conclusion that the deflation wolf has won… For months I wrote about how inflation was winning but the deflation wolf was always at the door… Well… After viewing the landscape of falling stock prices, falling commodity prices, and falling home prices, I have to think that inflation is no longer the king of the hill… Deflation is all around us folks… The only things you don’t see falling are Consumer prices and bond prices… But those bond prices are sure to fall given the glut of Treasury issuance coming down the pipeline… And Consumer prices? Well, if Consumer Spending keeps falling off the cliff, then you can expect Consumer Prices to fall too…

But inflation isn’t going away… And in my opinion, it will hide out on the other side of this deflationary period… And at first it will look much like 1976 all over… 1976 was a great year, right Christine? But it wasn’t a great year for stagflation…

So… What does this mean for the currencies and precious metals? I don’t think it spells a Happy Days while the deflation is going on… But… On the other side of the deflation, it could very well spell rallies in currencies and metals that will be huge! You see, the Trading Theme remains in place for most of 2009, as we work through the deflation… And then as the Trading Theme is removed slowly, inch by inch, step by step, there will be an unwinding of “Safe Haven” trades (read U.S. Treasuries) and the race to the bottom for the dollar will be on…

That’s how I see it from my seat here on the Trading Desk in St. Louis Mo. Home of the 10-time World Champion St. Louis Cardinals! It’s not a pretty picture, near term, that I’m painting this morning, but even an artist paints some ugly pictures now and then… I know of one, no never mind, no need to go into that.

OK… You’ve been very patient, waiting for the update in currencies… So, here we go!

The currencies played the Trading Theme to a “T” once again yesterday… When I left you yesterday morning, the euro was trading 1.2845… But then, more deep, dark, dangerous data printed for the U.S. and the dollar slapped down the single unit and every other currency that got in its path. The data came in the form of the latest reading of Manufacturing in the U.S. The ISM Index fell from 43.5 to 38.9, a low since September 1982! OMG! For the new kids to class, the ISM Index draws a line in the sand at a 50 level… Any number above 50 equals expansion… Any number below 50 equals contraction… We haven’t seen manufacturing contract at this level since September 1982… And the NBER still hasn’t put the “recession sign” on the economy’s door? Geez Louise, what do these guys need to prove to them that we’re so deep in recession right now?

So… With that bad data in the books… The dollar rallied and pushed the single unit to below 1.27 for most of the day… We’re seeing some recovery this morning, and the euro has popped back up above 1.27… This morning, they are reporting from Europe that borrowing costs (LIBOR) have fallen a bit, thus loosening the purse strings… Recall, this was another of the things knocking the stuffing out of the euro and other currencies, as Financial Institutions in Europe stopped borrowing in LIBOR because the rate had gotten totally out of control on the high side. Instead, the Financial Institutions used the currency swaps market, selling their reserve currency (read euro) to raise the capital needed as reserves against the toxic waste they had on their books…

It was my assumption when hearing about this change to currency swaps to generate cash, that this would come crumbling down once LIBOR got back to what would be considered a “fair rate” for borrowing, and the swaps would get unwound, meaning the currency sold in the swap would be re-purchased. It will be interesting to see if this plays out, even with the Trading Theme in place.

The Reserve Bank of Australia (RBA) cut interest rates last night by a larger margin than I expected… I had thought the RBA would cut 50 BPS… Instead, the RBA followed up last month’s 100 BPS cut, with a 75 BPS cut! WOW! They aren’t messing around, eh? Before you skip down to the Currency roundup to see what the A$ is doing after a 75-BPS rate cut, no need… The A$ has rallied since the rate cut news! Talk about perverse! Currencies these days are just strange… Well, I guess it’s not the “currency” but the Currency Trader! But, who am I to look a gift horse in the mouth? The A$ is rallied…

The Canadian dollar / loonie rallied last night too… Hmmm… I’m sitting here thinking about these rallies and started humming the great song by the Who… Won’t Get Fooled Again! For I know that the Trading Theme is in play… Yes, it’s the Same Old Song… Ahhh the Four Tops too!

So, one down, two more to go… That is Central Bank rate cuts this week… Still to come… The Bank of England (BOE) and the European Central Bank (ECB)… The performance of the A$ after the rate cut is promising for these two currencies; pound sterling and euros respectively… But remember the Who!

Recall last week, when I was talking about having the fear that the Bank of Japan’s (BOJ) Ministry of Finance would intervene to stem the yen’s rise… Well, unless they’re lying… And we have no reason to believe they are… The BOJ announced last night that there was no currency intervention last week… Hmmm… Just wondering why then, did yen fall from 92 to 99? I doubt the rate cut on Friday had anything to do with it… Must have been all the jawboning…

Well, that, and… The fact that as things in the credit markets loosen up a bit, those cocky Carry Traders get back on their feet… And we all know that Carry Trades to yen are like kryptonite to Superman!

The data cupboard is pretty bare today, with only September Factory Orders on the docket, which are expected to drop -.8%… And Fed Head Fisher, will be speaking in Texas on economic challenges in Texas… Fed Head Fisher is always good for a quote… But this is election day, and most likely he will be a forgotten man today.

I’ll finish up today and head to the Big Finish right after I tell you about this little ditty that the Wall Street Journal reported this morning… “The Treasury Department is considering using more of its $700 billion rescue fund to buy stakes in a broad range of financial companies, not just banks and insurers. In focus are companies that provide financing to the broad economy, including bond insurers and specialty finance firms such as General Electric’s GE Capital unit, CIT Group and others.”

Hmmm… Is it not bad enough that now these finance companies are going to get bail out money too? But… What’s with the “others”? I sure hope they mean “other” finance companies, and not just “others” that need a bail out… Like, say, Joe’s Bar and Grill! YIKES! The Treasury Dept is out of control folks, and there’s no reining them in now… We’ve given them too much rope! UGH!

Currencies today 11/4/08: A$ .6875, kiwi .60, C$ .8525, euro 1.2785, sterling 1.5865, Swiss .8565, ISK (no live quote), rand 9.8910, krone 6.6950, SEK 7.73, forint 202.90, zloty 2.77, koruna 18.915, yen 99.50, baht 34.90, sing 1.4740, HKD 7.75, INR 47.72, China 6.8360, pesos 12.70, BRL 2.1410, dollar index 85.77, Oil $63.85, Silver $10, and Gold… $737.40

Source: Election Day!

The currency markets continued to get hammered by the US$ on Friday with the dollar index climbing all the way back above 76, a level we haven’t seen since mid February. The dollar did sell off a bit in early European trading, but it has started to climb again as I write.

Several readers sent me an excellent opinion piece by James Turk which appeared on GoldMoney’s website. Mr. Turk points to central bank intervention as a major reason for the recent dollar strength. The article agrees with what I was saying last week; that the dollar has no fundamental reason to be rallying. The reports and news out of the US have not been favorable to the greenback, and the twin deficits in the US continue to soar out of control. I mentioned that the recent moves of the dollar smacked of intervention, as the dollar only wanted to move in one direction, ignoring any data which would typically send it back down. Turk points to some data which backs up this intervention theory:

“When central banks intervene in the currency markets, they exchange their currency for dollars. Central banks then use the dollars they acquire to buy US government debt instruments so that they can earn interest on their money. The debt instruments central banks acquire are held in custody for them at the Federal Reserve, which reports this amount weekly.

On July 16, 2008 (the closest date of the weekly reports to the July 15th low in the Dollar Index), the Federal Reserve reported holding $2,349 million of US government paper in custody for central banks. In its report released today, this amount had grown over the past three weeks to $2,401 million, a 38.4% annual rate of growth. To put this phenomenally high growth rate into perspective, for the twelve months ending this past July 16th, assets in the Federal Reserve’s custody account grew by 17.3%, which is less than one-half the growth rate experienced over the past three weeks.
So central banks were accumulating dollars over the past three weeks at a rate far above what one would expect as a result of the US trade deficit. The logical conclusion is that they were intervening in currency markets. They were buying dollars for the purpose of propping it up, to keep the dollar from falling off the edge of the cliff.

You can read James Turk’s entire article at http://www.goldmoney.com/en/commentary.php#current. He makes a convincing argument. As Chuck and I have pointed out in the past, intervention (even cooperative central bank intervention) can only impact the markets for the short term. Economic fundamentals will eventually win out, so the central banks have only bought themselves a little time. Unless the economic data in the US does an about face (and I don’t expect it to), the US dollar will remain in its long term downward trend.

Friday saw the release of additional US data which would usually have moved the dollar lower, but not in this dollar bull environment. US non-farm productivity slowed, increasing at a 2.2% pace vs. last months 2.6% rate. Unit labor costs came in just under expectations, and wholesale inventories rose by almost 2 times the expected rate. This increase in wholesale inventories is somewhat telling, as companies were unable to sell all of the goods which they were producing. Could US consumers finally be slowing their spending? If so, it would mean an even more dramatic drop in GDP for the last half of 2008.

This week will bring a number of big economic reports here in the US, non of which are expected to be dollar friendly. Tomorrow we will get the Trade balance which is expected to have ballooned back above 60 billion in June. We will also see the monthly budget statement and ABC consumer confidence. Wednesday will bring us the Import price index in the US along with advance retail sales and business inventories. July Consumer Prices in the US lead off the reports on Thursday, followed by the weekly jobless claims. And we will close out the week with the empire manufacturing numbers, TIC flows, industrial production, and Chuck’s favorite, the capacity utilization numbers for July. If the reports come in where expected, the dollar bulls may start running for the hills.

The euro has gained a bit this morning after policy makers said the ECB remains focused on inflation and traders are beginning to realize last week’s 3.6% drop was excessive. The euro also rebounded due to expectations that government reports released this week will show consumer price growth in Europe accelerated to a 16 year high last month, more than double the ECB’s 2 percent ceiling.

If the UK producer prices are any indication of what the Eurozone inflation numbers will look like, the ECB will have to take a serious look at moving toward a tightening bias again. UK producer prices increased in July at the fastest pace since records began in 1986. Prices charged by factories rose 10.2% from a year earlier. Double digit inflation is not going to keep the BOE or the ECB on the sidelines for too long. If this rate continues, they will be forced to raise interest rates in order to combat this runaway inflation.

Danish inflation was also reported this morning, and came in at a 18 1/2 year high of 4%. These increased costs are rising concern among European central banks that employees are going to start to demand higher pay to compensate them for lost spending power which has been eroded by inflation. Denmarks labor shortage, with unemployment at 1.6% in June, means employers are more likely to give in to demands for pay increases. I would look for the Danish central bank to raise rates in order to combat this wage rate inflation risk. Higher rates should equate to a stronger Danish krone going forward.

Australia’s central bank is not helping out their currency, as the continue to signal rate cuts are in store. The Reserve Bank of Australia said in its quarterly policy statement released today that it will have more room to cut interest rates because of a ’significant moderation’ in domestic demand will slow inflation, cut economic growth in half and drive up unemployment. Today’s statement suggests Governor Glenn Stevens will ignore a spike in the inflation rate to prop up an economy buffeted by weaker domestic spending and falling house prices.

Doesn’t Governor Stevens see what has happened in the UK? Does he really want to take his country down this path of runaway inflation combined with a slowing economy? I hope not, but the statement does suggest that the RBA will begin to look at a possible interest rate cut as early as next month.

The Olympic opening ceremonies were quite a spectacle, it amazes me how much money and planning went into them. Much has been written about how these games are a chance for China to show the world just how far they have come in moving into world’s economic elite. Recently, China has been slowing the pace of their currency appreciation, preparing for the global economic slowdown which is expected to deepen. The yuan retreated in the last two weeks after government officials said supporting growth is as important as fighting inflation. Exporters had begun to complain about the pace of the Renminbi’s appreciation, and with a slowing economy there will probably be less need to keep up the rate of the currencies rise vs. the US$.

This should be an interesting week. The data in the US shouldn’t be supportive of the dollar, so we will see if the central banks want to fight the underlying economic fundamentals and continue to prop up the greenback. I would expect us to see the dollar lose much of its recent strength, but the last two weeks have shown me just how wrong a little central bank intervention can make me look. With Chuck, Kristin, and Jennifer all out this morning, Christine and I will be doing the trading this morning. Monday’s are the biggest trade day for us, so I better cut it off here and get to work.

Currencies today 8/11/08… A$ .8903, kiwi .7040, C$.9392, euro 1.5024, sterling 1.9227, Swiss .9277, ISK 81.52, rand 7.6909, krone 5.3287, SEK 6.2521, forint 157.67, zloty 2.1754, koruna 16.05, yen 109.83, baht 33.74, sing 1.4063, HKD 7.8095, INR 42.176, China 6.8577, pesos 10.137, BRL 1.6087, dollar index 75.89, Oil $116.00, Silver $15.34, and Gold… $860.35

That’s it for today… I love watching the Olympics, not only the big name sports like swimming and gymnastics, but also the lesser known sports which typically don’t get any TV coverage. These are the athletes who aren’t going to get any multi million dollar endorsement deals, but have still dedicated their lives to being the best at their chosen sport. With Chuck, Kristin, and Jennifer all out this morning, Christine and I will be doing the trading this morning. Monday’s are the biggest trade day for us, so I better cut it off here and get to work. Sure hope the airlines don’t decide to further delay Chuck’s flight home! Hope everyone has a Marvelous Monday and a terrific rest of the week!!

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

Source: Central Bank Intervention is the Reason…