US Dollar

The trend toward a lower dollar cannot be ignored this week.  The EURUSD ended last week at 1.4303.  Today is is pushing 1.4600.  The GBPUSD closed at 1.6396.  Today the close is pushing 1.6685.   USDJPY has moved from 93.00 to 90.50 today.  Finally, the USDCHF went from 1.0603 to 1.0365.  

The moves came during the 1st week after the traditional end to the 2009 summer.   The catalyst for the selling seems to be a concern about US debt.   President Obama went before a joint session of Congress and the American people touting his health reform plan.  Wall Street seems to be concerned about the costs and this may have contributed to the selling. 

Over the last week, the markets have been abuzz with chatter about how the US recession will soon come to and end, followed by a quick and healthy recovery. According to investor logic, the result would be a rise in inflation and interest rates. This optimism was partially deflated today, as the Federal Reserve bank conducted its annual monetary policy meeting.

A recent WSJ headline reads, Good Economic News Threatens the Dollar, and summarizes the Dollar’s trading pattern as follows: “Demand for the U.S. currency continues to erode amid a tide of more encouraging economic data and corporate earnings that have fed a thirst for riskier assets such as stocks, commodities, and growth-sensitive currencies.”

As reported today by the Mortgage Calculator and other sources, the US housing market could be in the early stages of recovery. “Nationwide, home resales in June are up 9 percent from January, on a seasonally adjusted basis. Sales of new homes have climbed 17 percent during the same period. And construction, while still anemic, has risen almost 20 percent since the beginning of the year.

There was never much doubt about the underlying causes of the credit crisis. Basically, combination of low interest rates and lax regulation fueled a leveraged credit expansion, which exploded spectacularly last fall. The main issue has always been how to ensure such a crisis doesn’t ever happen again- at least not on the same scale. Towards that end, policymakers around the world have been busy over the last few months conducting hearings and soliciting expert testimony, and are now close to passing sweeping overhauls of their countries’ respective financial systems.

After a brief pause, China’s foreign exchange reserves have resumed their blistering pace of growth: “The reserves rose a record $178 billion in the second quarter to $2.132 trillion, the People’s Bank of China said today on its Web site. That dwarfs a $7.7 billion gain in the previous three months.” Considering that the global economy remains embroiled in the worst recession in decades, this is frankly incredible. [Chart below courtesy of WSJ].

There is a pattern in the following smattering of forex soundbites: “It feels like we’re already in the summer doldrums;” “[We] are moving into summer trading;” “We are in a summer period.” From three different analysts, three identical conclusions- summer has arrived.  Granted, summer officially began on June 21, but given all that’s transpired since last summer, I think we can excuse investors from delaying their summer vacations this time around by a few weeks, until the kickoff

Over the last few weeks, the stock market rally has fizzled and commodities prices have cooled off. It’s not clear what triggered this sudden surge in introspection (I would call it reasonableness). Regardless, the markets are now wondering out loud whether the optimism of the second quarter wasn’t a bit naive.

The debate over US inflation continues to be waged- in academic circles, among economists, and in the financial markets. There is no still no clear consensus as to the likelihood that the inflation will flare up at some point, as a result of the Fed’s easy monetary policy and the government’s record budget deficits. While the unprecedented nature of this crisis means that such a debate is still a matter of theory, that hasn’t stopped both sides from weighing in, often vehemently.

With this week slow for news and other economic developments, some forex traders are taking a step back to look at the long-term picture. The US Dollar, in particular has come into focus, because of the uncertain consequences of its current economic policy and the related talk of central bank diversification away from the Dollar. “The United States’ expansionist fiscal and monetary policies, which are raising fears of inflation down the road that could erode the value of the dollar, is surely driving diversification out of dollar-denominated asset…The dollar has weakened whenever talk about an alternative reserve currency makes the headlines.”