Volatility was basically non-existent during Friday trading with less than a .50% difference between the high and the low of the dollar index. The overall bias, however, was a weaker dollar and the euro held onto 1.29 for a majority of the day and was near 1.2920 as I left the desk. The pound and Swiss franc were the only two currencies left on the bench last week with losses of about 1% and 2.5% against the dollar respectively. The rest were able to turn in a decent week with the Swedish krona on top of the pile posting a 6.5% gain.

The SEK got beat up last month on concern of its lending exposure to the Baltic states but traders have come in not only on thoughts of it being oversold but also as risk aversion has eased a bit. We saw Swedish inflation fall to a 3 year low of .9% as rising unemployment and slower demand are keeping prices contained. Their central bank, the Riksbank, will meet on Friday and most are looking for a .25% cut to .75%, so we’ll see if there are any surprises. The bottom line, not only with this currency but all of the other small European currencies, is that the euro needs to appreciate in order to provide any type of sustained traction.

I saw a report where Citigroup’s technical analysis team said that if the euro trades above 1.2992, we could see sharp appreciation and a break out of this range bound trading pattern we have seen for a while now. They didn’t provide any estimates as to how much but we did see he euro snap out of its 4 week decline last week. Its nice to see that we aren’t the only ones out there taking notice that a turn in the currency market could be inching closer.

As I came in this morning, we had a sizable sell off in the dollar during overnight trading with the euro shooting up to 1.3040. It looks as though investors in Asia were feeling better after the results of the G-20 meeting. The Asian stock markets were up on the day as the G-20 finance ministers vowed to combat the global recession by working together to clean up the toxic assets and OPEC refraining from cutting output. We blew right past that 1.2992 figure here this morning so we should get a better idea of its staying power as the day progresses.

China threw a cat among the pigeons as they voiced concerns about their holdings of US Treasuries and wanted assurances their investments are safe. Premier Jiaboa said “We have lent a huge amount of money to the US and I request the US to maintain its good credit, to honor its promises, and to guarantee the safety of China’s assets.” A Chinese analyst commented that they are worried the US may solve its problems by printing money which would stoke inflation and if the US can make sure this won’t happen, then China should continue to invest.

President Obama quickly responded to ease those concerns by saying in a press conference “Not just the Chinese government, but every investor can have absolute confidence in the soundness of investments in the US.” Continued Chinese investment in Treasuries are crucial in financing the stimulus packages. I wouldn’t think any type of a major sell off is likely but I could see them backing off a bit if they don’t feel comfortable. It will be interesting to see if anything changes going forward, but I don’t blame them for wanting some type of re-assurance.

With not much to report on from Friday, we can look at what is due out here in the US this week. This morning we have Empire manufacturing, TIC flows data from January, and February industrial production along with capacity utilization. The TIC figures are going to be a big one, which are supposed to show an increase, and will tell us for sure if foreigners were still buying up US financial assets. The rest of the data out today is expected to disappoint.

Tuesday brings us supply side inflation with the producer price index and Wednesday will give us CPI along with the 4th quarter current account balance. The Fed meets on Wednesday as well and are expected to keep rates unchanged but any comments or statements that result could be market movers. We round out the week with jobs numbers and leading indicators, both of which are expected to be worse than previous figures.

All in all, the data out this week points toward a continuation of the recessionary pressures and not much in the way of good news. Lawrence Summers cautioned that monthly job losses of 600k+ are unlikely to end soon and job cuts are probably not going to stop imminently. Consumer spending is the back bone of our economy so as job losses continue to mount, its difficult to see any type of sustained improvement.

I’ll finish up with gold today as it continues to quickly bounce off of the minor sell offs we have seen. The actions taken by the Swiss National Bank last week have tarnished its view as a safe haven investment in some eyes, so gold would seem to be one of the few assets left classified as such. UBS said a couple of weeks ago they see gold trading as high as $1,100 within the next three months, which doesn’t seem too far fetched especially as support levels continue ratcheting upward. We’ve seen a small pullback so far with the risk takers out in the markets this morning but its still holding onto $920 as I write. Until tomorrow…

Currencies today 3/16/09: A$ .66.19, kiwi .5309, C$ .7900, euro 1.3027, sterling 1.4221, Swiss .8452, rand 9.9158, krone 6.7672, SEK 8.4452, forint 227.89, zloty 3.4308, koruna 20.4326, yen 98.26, sing 1.5329, HKD 7.7528, INR 51.3350, China 6.8382, pesos 14.5153, BRL 2.3051, dollar index 86.667, Oil $44.24, Silver $13.0750, and Gold… 924.52.

Source: A Building Block

As a result, gold has started to shine again as a stable source of value at a time when the dollar and other commodities – like oil and copper – have fallen hard. The spot price of gold has climbed above $870 an ounce on the New York Mercantile Exchange, up about 20% from its October lows.

Gold has been on roller coaster ride in 2008, moving from its all time high of $1035 in March, to as low as $681 an ounce. Some of that decline occurred during the recent stock market plunge. Many investors were forced to liquidate profitable gold positions in order to raise money to cover their paper losses.

Its decline was then accelerated by the recent onslaught of financial bailouts, as many investors held a preference for liquidity and safety in the form of cash holdings guaranteed by the U.S. government.  That was reflected in the skyrocketing prices of government bonds and investments in government-backed banks, which also lowered yields.

But with the Fed’s recent decision to cut its target interest rate to a range of 0% to 0.25%, the dollar has suffered a significant decline. Suddenly, foreign investors who were scooping up dollars have cut back on their flight to safety, knocking the dollar index (NYBOT: DX) down 10% in the last month.  The index reflects the dollar’s value against the Euro, Japanese Yen, British Pound, Canadian Dollar, Swedish Krona, and Swiss Franc.

The Fed’s interest rate cut may also have given gold a comparative boost in the eyes of investors. Gold, which never pays interest, suddenly doesn’t look so bad when compared to T-bills, which also are paying zero interest lately.

Volatility has risen this year compared to previous years, and the last few months have been the most volatile of all – an indication of investor ambivalence. But any uncertainty about the increasing price of gold may have been waylaid by the Fed’s recent rate cut and its dampening effect on the dollar and Treasuries.

Consequently, don’t expect this rally to be short-lived. As we pointed out in our 2009 Outlook Report on Gold, the fundamentals in the market hold the promise of more gains ahead.

It appears unlikely central bankers around the world will stop stimulating economies, printing money and doing whatever it takes until growth and confidence are restored – even if the cost is rampant inflation.

Consider these wild card inflation indicators that Money Morning Contributing Editor Martin Hutchinson believes will carry gold prices to $1,500 an ounce by the end of 2009:

• Over $7 trillion of freshly minted U.S. dollars are now in circulation with the aim of saving the global financial system.
• The incoming Obama administration has promised another $1 trillion or so stimulus package is on the way.
• It’s likely the Fed’s interest rate cuts will soon be followed by central banks around the world.

These economic stimuli are designed to do one thing – get the consumer spending again.

The bailout of the banks was the first step, but the banks are still keeping a tight rein on credit. Now the government is trying to get easily available, cheap money back into the hands of the consumer by running the printing presses around the clock.

“The government is pumping money in so many banks, and that money has to come out somewhere,” said Hutchinson.

Some of that money will “come out” into the economy in the form of higher stock prices. That will make consumers wealthier, and could give them more confidence in the economy. More confidence means more spending. As that happens, prices for goods should begin ticking upward, giving another booster shot to gold prices.

For instance some of that money is already going into gold bars and coins. In fact, the U.S. Mint was forced to suspend sales of the popular American Eagle and Buffalo gold coins for extended periods twice in the last year. The mint was unable to secure enough gold blanks from suppliers to match demand.

“I’ve never seen a case where demand was so high and supply was so short,” Chicago coin dealer Harlan Berk told the Associated Press.

With massive amounts of capital floating around, the time it takes to re-inflate the global economy will be far shorter than most analysts expect. Governments fear deflation more than anything.  It appears they will only fight inflation when they are assured they have won the first battle, which is growth at any cost.

When inflation kicks in, the dollar’s buying power will suffer long-term.  In fact, we expect a decline in all the world’s paper money, over time.  Historically, investors in gold have prospered during periods of weakening fiat currencies.

That leaves gold as a bright light in the investment world, making it an odds-on favorite to open a new leg of a long-term uptrend

Gold Bugs Have Fed to Thank for Recent Rally

I pulled a chart of year to date currency returns vs. the US$, and there are now 5 major currencies which have appreciated vs. the greenback: Yen +26.44%, Swiss + 8.07%, and Singapore, Danish Krone, & Euro + 1%. And with the recent big moves, our phones have been lighting up with investors moving back into currencies. I love the fact that all of these investors are diversifying, but the speed of this recent move demonstrates why we suggest keeping your investments spread across all asset classes. Trying to time into or out of a market can be frustrating, while keeping consistent asset allocations is the key.

The cut by the FOMC is putting pressure on other central banks to follow suit. Norway’s central bank cut its benchmark rate by 1.75%, a huge move meant to counter the growing global recession. The Norges bank said the rate could go even lower during 2009 as falling oil prices reduce the risk of inflation. The Czech central bank also cut rates yesterday, but kept its move at a relatively small 50 basis points.

Chuck sent me the following note last night, as he is feeling better and keeping an eye on the currency markets:

“So… I read to Dawn’s class on Wednesday, they were all so cute… They were completely convinced by the time I left that I WAS Santa Claus. I left to the sounds of “Merry Christmas Santa”… So cute!

What another day for the currencies, eh? 1.45 in euros? That’s a rise from 1.27 just a week ago. I read something that said this was the largest 1-week move higher EVER in the euro VS the dollar! I guess investors and traders don’t appreciate the Fed’s new ZIRP! (zero interest rate policy)

This is what the Japanese policy has been called for over a decade now, so why would the U.S.’s policy be any different? I’m turning Japanese… The stimulus packages are just like Japan’s of the 90’s I’m turning Japanese, I really think so… The bailouts, and everything in between is just like Japan of the 90’s!

The “other stars” right now are Gold and Silver… If you are a “believer” (and I’m not talking about whether I’m Santa Claus or not!) of the lofty prices for Gold that are being bandied about, then you have to think that these are bargain basement prices, and if these are bargain basement prices, then what we had just a month ago and all autumn long were dirt cheap prices! Dirty deeds, done dirt cheep! OK, I have no idea why I went into that AC/DC song! But see, I even do this at home! Which by the way, you should not try at home without an adult’s supervision! HA!

Now, most of you who are long time readers have probably been asking where Chuck’s take on the Bernie Madoff scandal is…. Well, I would be right there with my voice, if it wasn’t the SEC… The last thing I need is to get in a fight on a Saturday night in Jackson Mississippi, with the SEC! But, I don find it to be very sad that the SEC admits that the SEC had credible and specific allegations going back to at least 1999! Now investors are licking their wounds to the tune of at least $50 Billion in losses… I’ll steer clear of this one, and let those that have armored shields take their shots…

Have a great day! I’m off to the eye doctor, and not “looking” forward to it!”

I spoke to Jeff Opdyke at the Wall Street Journal yesterday about a story he was writing with regard to the Japanese yen. He was wondering why the BOJ hasn’t intervened yet. It is an excellent question, as the yen has continued on its assault on the US$ unabated. Finance Minister Shoichi Nakagawa has been trying some verbal intervention, letting currency traders know that they stand ready to intervene. But the BOJ is smart enough not to jump out in front of a freight train, and as Chuck points out above, the speed of the dollar’s recent fall has been unprecedented. Also, since Japan imports almost all of their oil, a stronger yen reduces the price of crude imports. So at least some of the pain felt by Japanese manufacturers/exporters is being mitigated by these lower oil prices.

If Japan does intervene, the thin markets during the holiday season would be an excellent opportunity. There is also a chance that the BOJ will lower their interest rates tomorrow, following their two day policy meeting. This would be another good opportunity for additional ‘verbal’ intervention. Holders of yen may want to book gains, and look toward the Singapore dollar or Chinese Renminbi to maintain their Asian exposure.

India’s rupee has climbed for a fourth day as the Indian stock exchange headed for the biggest advance in more than a week. Capital inflows across all of Asia have increased as the dollar continues to lose its status as a safe haven. India’s inflation rate, as reported today, fell to the lowest since March as crude oil prices have fallen. Prices increased 6.84% last week vs. an expected increase of 7.5%. The slight fall in inflation may allow officials to lower interest rates, which are currently some of the highest in Asia. The rupee has benefited from high interest rates as investors return to carry trades.

The Australian dollar will increase another 12% vs. the US$ according to a note by the head of currency strategy for National Australia Bank Ltd. The strategist believes the Aussie dollar hit a bottom of 60 cents in October, and says the currency will begin to outperform as growth in China starts to recover. He targets 79 cents as the top.

We agree with the report, and suggest the Aussie dollar will again begin to rally as the commodity prices recover. Raw materials account for 60 percent of Australia’s exports, with China being one of their biggest customers. Growth in China has slowed, but remains at a relatively strong level above 6%. The stimulus package announced by China will concentrate on infrastructure construction, which will increase demand for commodities.

Currencies today 12/18/08: A$ .7081, kiwi .6002, C$ .8432, euro 1.4675, sterling 1.5366, Swiss .9541, ISK 112.19, rand 9.7288, krone 6.6677, SEK 7.5780, forint 183.20, zloty 2.837, koruna 18.1062, yen 88.39, baht 34.39, sing 1.4279, HKD 7.75, INR 46.95, China 6.8292, pesos 13.18, BRL 2.3527, dollar index 77.822, Oil $40.68, Silver $11.39, and Gold… $875.98

Source: Santa Rally Continues

Good day… Not sure when all of you will be receiving this today, as it took nearly over a half hour for my computer to boot up this morning. But its all good news for currency investors, so I’ll get it written and out to you as quickly as I can. The dollar slowed its decent overnight, but continued to fall vs. most of the major currencies as the US Senate rejected the $14 billion bailout for the auto industry.

The big winner in the Senate rejection of the bailout plan was the Japanese yen, as Japanese car makers are predicted to grab an even bigger piece of the US auto market. The yen, which has been rallying due to global deleveraging and carry trade reversals, suddenly had another reason to rally. The yen rose to a 13 year high, trading below 90 yen per dollar, and some are now predicting a rise to 80. Finance Minister Shoichi Nakagawa boosted the yen further after telling reporters in Tokyo that Japan isn’t considering intervening in the currency markets.

But even before the automakers got the bad news from the Senate, the dollar was falling faster than we’ve seen in the past few weeks. Chuck shouted out across the trade desk around noon yesterday that the dollar index, which tracks the greenback against the euro, yen, pound, Canadian dollar, Swedish krona, and Swiss franc, had fallen below the 55 day moving average. This is a major level for technical traders, and signaled the dollar could be headed for a further fall.

The data released yesterday showed initial jobless claims in the US surged to a 26 year high as the recession deepened. Claims increased to 573,000 last week, an increase of 58,000 from a revised 515,000 the previous week. The total number of workers staying on the benefit rolls jumped to just below 4.5 million, the most since November 1982.

While the markets had predicted another increase in the jobless claims, the trade deficit numbers were a big surprise. US exports slid to a seven month low causing the trade deficit to widen to $57.2 billion in October. No one I read was predicting a widening deficit. The worsening trade balance removes what has been the sole source of support for the economy during this recession.

A separate report issued by the Federal Reserve showed US household wealth fell by the most on record in the third quarter. Net worth for households and non-profit groups decreased by $2.81 trillion, the most since records began in 1952. So we have record unemployment, a widening trade deficit, and falling consumer net worth; not a good picture for the incoming President. But President Elect Obama has a plan, we can just spend our way out of this problem!! Chuck sent me the following comments yesterday afternoon:

“So… All this week I’ve talked about the President-elect’s plan to spend more money since 1950 on infrastructure, which is fine in good times, but these are faaaaaaaaarrrrrrrr from “good times” for the economy… Well… Yesterday the P/E said this, “We understand that we’ve got to provide a blood infusion to the patient right now to make sure that the patient is stabilized. And that means that we can’t worry about the deficit.”

Can’t worry about the deficit? Did I hear that correctly? Geez Louise, here we go again, sliding down the same old slippery slope of “deficits don’t matter”! Aye, yi, yi! What is everyone smoking? I’ve said this before many times at presentations, and here in the Pfennig, but I can’t pass this up… These people, who should know better, that claim that deficits don’t matter, remind me of the guy standing on top of the Empire State Building, and decides to jump off… As he passes the 56th floor he says… “So far… So good!”

Well, that’s right, so far he hasn’t hit the ground! And… So far deficits have only bruised us, but they haven’t hit the ground yet either! A quick look at my fave book on deficits, I.O.U.S.A. tells me that we’ve passed the $10 Trillion mark for Federal Debt… “today’s deficits reduce national savings, which dramatically decreases productive investment and wealth-creating activities. Increased indebtedness to foreign lenders puts future financial decisions in the hands of people who may or may not have our interests in mind when they make them. Further, interest payments that have historically stayed home now provide more and more income to investors abroad.”

“At the current rate, with existing laws, by 2040 the federal government will be spending twice as much as it takes in from taxes. Our children and grandchildren already face a more competitive, challenging, and uncertain world than most Americans have grown accustomed to.”

Failure to recognize this by our leaders is the biggest mistake we can make… And comments like the one above from the new PE lead me to believe we’ll have more of the same old “deficits don’t matter” and that, my friends will eventually weigh heavily on the dollar…

Sorry to be so gloom and doom on a Friday… But that comment by the new PE just sent me reeling! Now, back to Chris…”

I’ve known Chuck for nearly 20 years now, and nothing gets his blood boiling as quick as the saying ‘deficts don’t matter’! The leaders of Europe sure think they matter, as the EU decided to trim down a proposed stimulus package, as Germany warded off calls by France and Britain for deficit-boosting programs. This announcement, combined with a statement by ECB council member and Bundesbank head Axel Weber caused the Euro to jump vs. the US$. ECB member Weber cautioned against reducing interest rates below 2 percent, suggesting the bank is probably near the end of its rate-cutting cycle. “If the benchmark rate sinks below 2 percent when medium to long term inflation expectations are just below 2 percent, that implies negative real interest rates,” Weber said in an interview. “I would like to avoid that.”

Weber knows the long term impacts of negative real interest rates, they are very inflationary. The generation before his lived through the German hyper inflation of the early 1920’s which helps explain why financial leaders from Germany are such inflation hawks. So the 75 basis point cut by the ECB last week, which was the biggest in ECB history, will likely be the last cut for some time. The Euro has benefited from this perceived change in attitude. As of this morning, the Euro has risen over 5 percent vs. the US$ this week.

We have been suggesting that the recent dollar rally was not a change in the long term trend for the dollar, and some big name currency traders are starting to jump on our bandwagon. Goldman Sachs Group lowered its forecast for the dollar against the euro and the yen for 2009, saying the repatriation of overseas assets by US investors and demand for the greenback for funding are ‘diminishing’. Goldman is now predicting the Euro will rally to $1.45 per euro by the end of next year, up from their previous prediction of $1.30. “We are at a turning point,” Goldman’s Jens Nordvig wrote in a research report. “We expect the dollar support from temporary deleveraging and funding flows to diminish, and, in that scenario, the underlying pressure from more standard sources should once again become more important.” Sounds like he has been reading the Pfennig, as Chuck has been calling for a return to underlying fundamentals for a while now!

The folks at Citigroup are also jumping on the dollar bear bandwagon. “There are good indications that the US dollar is likely to weaken against many Asian currencies into year-end,” wrote Tom Fitzpatrick and Shyam Devani, analysts at Citigroup. They went on to say the dollar will retreat from a two year high against an index of Asian currencies after breaching levels where orders to buy the greenback are clustered. They believe the dollar will fall vs. the Singapore dollar, Chinese Renminbi, and the Indian rupee.

The Chinese Renminbi continued to rally for a seventh day in a row, the longest winning streak since June. Assistant Finance Minister Zhu Guangyao vowed to keep the currency at a ‘reasonable and balanced’ level after the Chinese let it drop sharply on Dec. 1. China stalled the Renminbi’s appreciation in July to aid exporters after letting it rise 6.6% in the first half of 2008. I think China will continue to slowly let the Renminbi appreciate, but will keep the pace of the appreciation at a manageable rate of 6 to 7 percent per year. China’s economy is slowing, but Asia will continue to be the growth engine of the global economy. I still suggest investors allocate at least a portion of their investments into the Asian currencies of Singapore, Japan, or China.

Currencies today 12/12/08: A$ .6586, kiwi .5453, C$ .8038, euro 1.3363, sterling 1.4962, Swiss .8473, ISK 218, rand 10.2214 krone 6.8858, SEK 7.9616, forint 197.96, zloty 2.9621, koruna 19.488, yen 90.35, baht 35.01, sing 1.4918, HKD 7.75, INR 48.577, China 6.8433, pesos 13.3266, BRL 2.3684, dollar index 83.68, Oil $44.97, Silver $10.10, and Gold… $817.05

That’s it for today… Drove the side streets in to work for the last time today. The highway department shut down a 5 mile stretch of interstate which runs from the front door of our office to my house. After a full year of taking side roads to and from work, I will be able to take the newly refurbished highway on Monday. This will drop my commute big time, and is great news for yours truly!! Chuck is off on his annual Christmas shopping trip with his buddies today. They start first thing in the morning and spend the entire day spreading Christmas cheer around town. Hopefully I will be able to meet up with them this evening, as they typically end their trip at a local restaurant/bar not too far from my home. Hope everyone has a Fantastic Friday, and a Wonderful Weekend!!!

Source: Bailout Failure Accelerates Dollars Decline

Good day…The dollar continued its assault on the world’s currencies yesterday as the dollar index moved above the 74 handle. I pulled a chart off the Bloomberg on my way out the door last night, and it showed the only major currency which was up vs. the US$ yesterday was the Swedish krona, which managed a .07% increase. This dollar rally has legs, but I still question the fundamentals behind the dollars surge. Today may be the day we see the dollar finally make a turn, as the ECB will be announcing their rate decision.

It is not that I expect Trichet to raise rates, but I do expect him to sound hawkish and refocus the markets attention on Eurozone inflation and away from worries about growth. Two reports out of Germany this morning will bolster Trichet’s hawkish stance. German exports rose more than economists expected in June, defying a stronger euro and pushing the trade surplus to a record. Exports increased 4.2% from may, the most since September 2006. German industrial production also increased for the first time in four months with output rising 1.7% from a year earlier. The IMF last month rose its forecast for German economic growth this year and said the global slowdown linked to the US financial crisis was less severe than it expected.

The entire global economy has been dealing with commodity price inflation, but so far this raw material price spiral hasn’t spilled over to wage pressures. While the severe slowdown in the US economy won’t allow increases in wages, the European economy isn’t in as bad of shape. Lufthansa, Germany’s largest airline, just announced a 5.1 percent raise to settle a strike. And Lufthansa employees aren’t alone in securing inflationary pay deals in Germany. Negotiated wages jumped 3.5% in the year through April, the biggest gain in 12 years. This wage spiral will keep the ECB focused on inflation, with another interest rate increase possible. ECB council member Klaus Liebscher signaled there may be need for still higher borrowing costs in Europe, saying in a July 24 interview that “we haven’t exhausted our room for maneuver”.

The euro rallied against the dollar in early European trading on speculation European policy makers will continue to hold their tightening bias. One of the reasons for the spike in the value of the US$ has been a shift in interest rate expectations. During the past month, several currency traders have begun to speculate that the next move by the ECB would be a drop in interest rates, while they gambled that the next move by FOMC would be up. Recent data would suggest these speculations could be completely wrong. The economic downturn looks like it will continue in the US, keeping the Fed from lowering rates, while the ECB is dealing with a stronger than expected European economy, and spiraling wage pressures. A change in these interest rate expectations could put the dollar back on its long term trend down, and send the Euro back to $1.60 or above.

The Bank of England kept the main interest rate unchanged for a fourth month as they find themselves in the exact same position as our Federal Reserve. Inflation has been accelerating, and the economy is teetering on the brink of a recession. UK housing prices dropped the most in a quarter-century and UK services, manufacturing, and construction all shrank in July. So the economy is dramatically slowing while inflation is predicted to more than double the 2% target. BOE policy makers split three ways on which direction interest rates should move, so their only choice was to just leave them where they are. England’s economic situation has left the BOE as impotent as the FOMC!

As I mentioned above, the UK reported that house prices fell at a rate of 8.8% in July. This morning we will get a better picture of the current status of the US housing market. A report from the National Association of Realtors will probably show its index of home sales fell for another month. The inventory of unsold homes in the US stands at the highest level ever recorded. And according to economists, the inventory of existing homes and condos must fall by almost 50 percent for prices to stabilize. Theres is an 11.1 month supply of existing unsold homes at the current sales pace, up from 4.6 months in September 2005. Almost one of every 10 US mortgages was in trouble during the first quarter according to the Mortgage Bankers Association.

Those that want you to believe the ‘worst is over’ in the US economic downturn only need to look at the pending home sales numbers, which is usually seen as a leading indicator. The index of pending home resales is expected to have fallen 1% after a decline of 4.7% in May. As we have been reporting for some time now, the falling housing market has far reaching effects on the US economy. While the folks at CNBC have been telling everyone that the worst is over after Paulson and Bernanke came to the rescue of Fannie and Freddie, some very smart people (whom I agree with) are warning that losses will continue to mount.

Nouriel Roubini, the New York University professor who predicted more than two years ago that the US would fall into a recession because of the bursting of the housing bubble and rising energy prices is one who disagrees with CNBC. Ty Keough pointed out an interview with Roubini which appears in this week’s Barron’s. I would encourage any of you who are starting to ‘drink the Kool-aid’ being pushed by Paulson and Bernanke to read it. In the interview, Roubini predicts that we are in the second inning of a severe, protracted recession, which started in the first quarter of this year and is going to last at least 18 months, through the middle of next year. He goes on to say we can expect a total of $2 Trillion of debt related losses in our financial institutions. Roubini states that banks have only started to feel the effects of the housing downturn, and that consumer-credit losses and home-equity loan write offs will substantially add to their pain.

He ends the interview with this: “Leaving aside the fact that we are going to have a pretty nasty recession and international crisis, the global economy is going to grow at a sustained rate once this downturn is over. There are significant financial and economic problems in the US and that’s why I’m bearish about the US. But the emergence of China and India and other powers is going to shift global economics and politics radically, and the world is going to be more balanced in the future, rather than relying on one engine, which has been the US. ..I’m quite bullish about the state of the global economy..”

I agree with Roubini’s take on things, and the best way to protect your portfolio? International diversification. Keep a portion of your assets outside of the US$ in currencies and precious metals. Investors should view this dollar spike as an excellent opportunity to purchase currencies and metals at cheaper prices, dollar cost averaging to get your overall costs down.

Japan’s government said the economy is “deteriorating,” acknowledging for the first time that the country’s longest postwar expansion has probably ended. “There is a high possibility the economy has entered a recession,” the head of business statistics at the Cabinet office said in Tokyo today. The Japanese yen continues to come under pressure due to the weakening economy and the recent move back into carry trades. In these carry trades, investors borrow currencies at low interest rates, sell them and invest the proceeds into higher yielding investments, earning the ‘carry’. With market volatility easing over the past month, many investors have moved back into these carry trades, pushing the value of the funding currencies of Japan and Switzerland down. As in the past, these carry trades can be reversed as quickly as they are put on.

Just in, the ECB left rates unchanged. Now we just have to wait Trichet’s press conference, which will occur in about 45 minutes. Better get to the currency roundup:

Currencies today 8/7/08… A$ .9106, kiwi .7178, C$.9546, euro 1.5468, sterling 1.9517, Swiss .9474, ISK 79.83, rand 7.4390, krone 5.1734, SEK 6.0846, forint 151.84, zloty 2.0966, koruna 15.54, yen 109.45, baht 33.58, sing 1.3837, HKD 7.8054, INR 42.06, China 6.8643, pesos 9.9398, BRL 1.5775, dollar index 74.08, Oil $120.17, Silver $16.60, and Gold… $882.40

That’s it for today… Chuck traveled out to San Francisco to speak at the money show. This is the first time in several years that I won’t be there, but things are just too busy on the desk as of late. I got to see Chuck at the Cardinal game the other night, and he was excited about getting back out to San Fran and addressing the crowds. I guess Brett Favre is headed to New York. I used to really like him, but this latest move dropped him a few notches in my book. Albert Pujols hit a Grand Slam last night to propel the Cards to another win. Maybe we will have post-season baseball in St. Louis! Hope everyone has a Tub-Thumping Thursday!!

Chris Gaffney, CFA
Vice President
EverBank World Markets
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Source: ECB to Change Dollar’s Direction?…