A Pfennig For Your Thoughts

In This Issue…

  • Poole has no inflation worries!
  • The ECB does have inflation worries!
  • Commodity Currencies on the rise…
  • Singing from the same song sheet…

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And Now… Today’s Pfennig!

A Double Whammy for the Dollar!

Good day… I trust you had a wonderful weekend… I was disappointed by both outcomes of the football games yesterday, but the Rams weren’t playing, so no big deal… There’s been a big move in the currencies since I signed off Friday morning… So let’s go to the tape!

The first part of a double whammy hit the dollar Friday afternoon, when St. Louis Fed President Poole (you may recall me lambasting him a couple of months ago with his “Deficits don’t matter” baloney) said in an interview that he’s less concerned with inflation than he was six months ago, and that the Fed may soon stop raising rates… Well, that note sent the dollar to the woodshed Friday afternoon, and the euro was soaring once again, but still within a trading range…

But the euro broke out of that trading range last night when the second part of the double whammy hit the dollar… European Central Bank officials (Noyer and Smaghi) were all over the news wires talking up interest rates, to combat the inflation pressures caused by a rise in oil prices…

And… This is what I’ve been talking my bald head off about! I even gave an interview to the Wall Street Journal last week, and told them about this scenario and how it would be bad for the dollar… This halt in interest rate hikes in the U.S. and the rising rates abroad… The halt in interest rate hikes would put the focus back on the financial stresses in the U.S. and lo and behold, it’s all taking place… I love it when a plan comes together!

So… The euro is all the way back to 1.2280… I had to wipe off the screen and do a double take when I first saw that this morning! Japanese yen got in on the dollar-whacking act, too, moving to the low 114 handle…

Don’t know if you’ve heard some of this new “Deficits Don’t Matter” baloney that’s coming from Harvard University economist Richard Cooper… He thinks that the gains the dollar made last year illustrate his position that the China experience will sustain the dollar for years to come… I’m firing off a memo to Mr. Cooper, a far better educated man than I am, and tell him that he needs to go back to school and check his research… The dollar gained last year because of the two-headed monster… Rising interest rates in the dollar’s favor, and the HIA repatriation of the dollar… I’m so sick of hearing about this “Deficits Don’t Matter” chatter that I’m banging on the keyboard right now! (Can’t you tell? HAHAHA!)

Nouriel Roubini, the well-respected economist that I’ve quoted many times in the past, believes that the whole China and Asian Central Bank relationship with the U.S. will break down, as the Asian Central Banks look to allow more flexible currencies. (read, stronger vs. the dollar!) And I whole-heartedly agree!

OK… Enough of that… Hey! How about that the Canadian dollar / loonie? The currency has stared today’s election right in the face and moved higher… I said last week that the currency had gotten whacked, not hard, but whacked, and to use it as a buying opportunity… Well… The loonie is now 2 cents above where it was trading last week! The markets look as though they are already looking past the election, and pricing in a rate hike by the Bank of Canada next Tuesday… I’ll also say that when this whole election thing was announced a couple of months ago, I said that as long as the Bank of Canada didn’t get sidetracked by the election banter and continued their rate hikes, the loonie wouldn’t suffer… The Bank of Canada has kept their focus… And the loonie has kept its value!

And the Aussie dollar (A$) has come back from last week’s levels, too! The stories all last week surrounding the A$ kept painting a dismal picture for the A$ because of a diminishing rate differential to the U.S. I wasn’t buying that nonsense… Commodity prices have been the fuel for the fire under the A$, and guess what? Commodity prices are on the rise again… And guess what again? The A$ is on the rise again, too!

Another commodity currency… The South African rand has really been on a tear lately… Of course, so has the price of gold… The rand has gained 6% vs. the dollar so far this year, which I know is only 3 weeks in the books… But I could go back to the low for the rand, which came in mid-November, and the return since then is around 12%!!! WOW!

Gold has seen a 20% rise since early November, so… The rand has really been lockstep with the price of gold, eh?

Speaking of gold… Our TOP TEN FINANCIAL INNOVATION FOR 2005, the MarketSafe Gold CD, has been the talk of the town since last Monday’s article on CBS MarketWatch… Countless local newspapers have picked up the story and featured it in their business sections… We close out the funding for this month’s issue tomorrow, but not to worry, we’ll be offering it again for February, so don’t put off looking into this CD any longer!

Oh… I see that European Central Bank Chief Economist Issing is talking this morning, and it looks like he’s batting cleanup! He’s taking some mighty swings at inflation, and saying all the right things, like… “The ECB will move to tackle inflation if necessary”… That’s right, Mr. Issing… Sing from the same song sheet as the other ECB members and provide that price stability!

Currencies today: A$ .7540, kiwi .6840, C$ .87, euro 1.2280, sterling 1.7850, Swiss .7935, ISK 61.15, rand 5.97, krone 6.55, forint 203.77, zloty 3.13, koruna 23.30, yen 114.20, baht 39.09, sing 1.62, China 8.0647, pesos 10.51, dollar index 88.10, and gold… $556.50

That’s it for today… Let’s cross our fingers that the U.S. traders don’t see those lofty levels and take profits right away today… Leading indicators for December today shouldn’t give the dollar any relief… Not much else to talk about, so have a great Monday and week!

Chuck Butler
EverBank World Markets