Wednesday, April 16, 2008

US Dollar Continues to Freefall

Good Morning. I hope you slept well because while you were sleeping the dollars in your pocket continued to shrink during trading in Asia. From Bloomberg:

``The dollar will remain mired in weakness,'' said Michiyoshi Kato, a senior vice president of currency sales in Tokyo at Mizuho Corporate Bank Ltd., Japan's third-largest bank by assets. ``The U.S. economy is already in a recession and won't be able to escape from it in the coming two years. This will force the Fed to lower rates to 1.5 percent.''

The dollar traded at $1.5934 per euro at 11:45 a.m. in Tokyo, after falling 1 percent yesterday and reaching $1.5979, the lowest since the European currency's debut in 1999. The U.S. currency may fall to $1.6020 a euro today, Kato forecast. The dollar was at 101.88 yen from 101.83 yen. The euro traded at 162.35 yen."

Bloomberg in the same piece also released the Philly Fed data:

"The Federal Reserve Bank of Philadelphia's general economic index was at minus 15.0 this month, completing a five-month contraction that was the longest since 2001, according to a Bloomberg News survey of economists. Readings less than zero signal contraction. The report is due at 10 a.m. New York time."

My Take:

The Philly Fed data is terrible. 5 straight months of contraction. I thought this was supposed to be a small short recession lasting 6 months? We better get a move on it and start consuming and partying like rock stars if we are at the bottom like Wall St. says we are.

One of the problems we have as we move deep into a recession is currency traders start to drool on themselves because they have an easy trade of shorting the dollar. They do this because they know the Fed will cut rates. The traders understand that we won't protect our currency like the ECB does.

This knowledge can also be used with other trades like oil. Is oil going up because of demand? Possible. Could the oil speculators be taking oil higher because they can make an easy trade by going long and blame it on the weak dollar? Possible. Combination of both? Most likely.

The problem with a weak currency outside of inflation and reduced pricing power is the risk you run with speculators in other markets. I think a lot of the commodities boom could be a combination of higher demand, a lagging US market, and the weak dollar.

My point here is if we protect our currency then we could at least rule out one of the causes of raging commodity prices. Oil touched $115 a barrel in futures trading last night setting yet another record. Everything we buy needs oil in order to be manufactured as a result it effects the cost of everything you buy. Its not just about how much it costs to fill up your car.

You could apply the same logic towards all other commodities. If you strengthen the dollar then maybe corn, wheat, and other commodities might soften a little in price.

Bottom line:

Everyone should be very concerned about inflation. A currency crash would DESTROY the economy immediately. The dollar has been nosediving day after day. Aren't you afraid of paying $5 dollars a gallon for gas this summer? I know I am. Something needs to be done to control prices because the average consumer cannot afford this on top of a $2500 mortgage payment.

The Fed needs to target inflation before the traders and the currency let it spiral out of control.

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