Dollar continues to slide...
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In This Issue..

* Dollar continues to slide...

* Housing bailout passes congress...

* Chinese Renmibi falls...

* Aussie dollar peaked?...

And Now... Today's Pfennig!

Dollar continues to slide...

Good day... And welcome to the last week of July. I spent the past week fishing with my son and father in law up in Manitoba, Canada. We had some great weather, and caught an absolute ton of Walleye and Pike. My son caught a Pike almost as long as he is tall. Just a great guys trip; but enough about my time off, I'm back at work now, so lets get to the currency markets.

The dollar continued to slide throughout Friday's trading as concern of further US credit losses trumped some negative data released in Europe. The dollar dropped for a second day against the Euro after a story in the Financial Times quoted Gary Stern, president of the Federal Reserve Bank of Minneapolis, saying the credit crunch will worsen. Nothing new here, but as Chuck stated in Friday's Pfennig, currency traders continue to play the game of "Who's Data is Worse" with the US economic data coming in even worse than the rest of the world.

Data released Friday showed US new home sales fell less than expected to 530k, down .6% from last month's numbers. The Senate passed the massive housing-rescue legislation which had made it through the House on Wednesday. President Bush dropped his opposition to the bill last week, so I would expect him to sign it quickly. The bill offers emergency funding to Fannie Mae and Freddie Mac along with establishing a $300 billion fund to help struggling homeowners. As regular readers know, Chuck is no fan of this bail out, and he sent me the following comments last night:

"The currency markets were dominated by a bias to buy dollars based on the Housing Legislation that passed last week... It's just another "bail out" I don't care how much lipstick they put on this pig, it's still a pig! Here's the skinny on the bail out...

The bill features a combination of tax relief for homeowners, a new regulator for Fannie Mae and Freddie Mac, and a $300 billion program to avert foreclosures. Also included is a dramatic Treasury Department proposal to help restore confidence in Fannie Mae and Freddie Mac by increasing their $2.25 billion lines of credit with the Treasury, as well as allow the government to potentially buy an equity stake in the firms.

Another $300 Billion to help out... Another $300 Billion added to the $150 Billion we already added to our debt earlier this year with stimulus checks... Where does this end? Well... I'll tell you where it looks like it's all going to end... Can you say, "we live in a banana republic?" Apparently the currency markets agree with Chuck, as they have reversed all of last week's dollar gains which occurred in some part due to this massive bail out plan.

The Euro is stronger this morning in spite of a fall in German consumer confidence to the lowest level in five years. Soaring energy prices have sapped purchasing power in Germany, Europe's biggest economy. Record oil and food prices pushed inflation in Germany to 3.4% last month, squeezing disposable incomes just as the euro's gains and a deepening US housing slump curbed demand for exports. But as we have written in the past, the markets know that the ECB will continue to focus on rising inflation, maintaining their hawkish bias. These higher interest rates should continue to keep the Euro well bid vs. the US dollar.

One currency which couldn't rally vs. the dollar over the weekend was the British pound, which continues to drop from $2.01 which it hit in mid-July. The UK economic situation is basically a copy of what we are facing here in the US. Data released today showed UK house values fell by the most in at least seven years in July. The report also stated that the property slump will continue for months. Prices fell 1.2% from June, the biggest annual drop since the index started seven years ago. The UK economy looks headed for a recession, and the BOE may have to drop rates after it left the key rate at 5% on July 10. I wouldn't be surprised to see the pound fall to $1.90 by year end.

Another currency which dropped vs. the US$ was the Chinese Renminbi which fell .2% over the weekend. This was the largest decline since the dollar peg was dropped in 2005. The fall came after the Chinese Politburo signaled a shift in focus to maintaining economic growth, fueling speculation they will slow gains to aid exporters. The Politburo, the Communist Party's top decision making body, wants to cool inflation and maintain "steady and relatively fast" expansion. We could see the Renminbi's appreciation slow significantly in the second half of 2008, as the government replaces preventing overheating with maintaining growth among its top priorities.

But don't look for a major fall in the value of China's currency. China will keep the Renminbi stable in a "self-initiated controllable and gradual manner," the People's Bank of China said in a statement on its Web site yesterday, after the monetary policy committee's second quarter meeting. The statement didn't reiterate the central bank's pledge to "increase the exchange rate's flexibility," included since the third quarter of 2007. The omission of 'flexibility' is being seen as a signal that the central bank will slow the pace of Renminbi gains. But I will again remind everyone not to expect any big moves in the Renminbi, as the currency is not allowed to trade outside a .5% band against the dollar on either side of the so-called central parity rate which is set by the government.

The Australian dollar held on and actually moved up slightly over the weekend after falling to a three week low on Friday after ANZ Banking Group Ltd joined National Australia Bank Ltd in warning of increased provisions for non-performing loans. Several currency strategists are now saying the Australian dollar's recent rally is coming to an end. The Aussie has gained 8.9% vs. the greenback this year, and has soared 44 percent over the past five years, on demand from China for the country's coal, iron ore, and nickel.

The Aussie $ has benefited from 12 increases from the Reserve Bank of Australia since April 2002 to curb inflation. Many of the currency strategists are now predicting a slide for the Aussie dollar this year, with Lehman predicting a drop to 85 cents as commodity prices fall and losses linked to subprime mortgage defaults slow global growth. But who can trust anything coming out of Lehman right now? I tend to agree with some of the Japanese analysts who continue to expect the currency to close the year at parity. Here is why I think the Aussie $ will continue to trade up: 1. As reported last week, consumer prices climbed 4.5% from a year earlier, the most since 2001. 2. Commodity prices will remain high, on Asian demand. These two factors should keep investors moving into the Aussie dollar, and the currency should hit parity by year end.

I would expect the US dollar to continue to trend off today, as we won't get any data releases to start the week. Tomorrow we will see more negative data on the US housing market as the S&P/Case-Shiller index is predicted to show another dramatic fall. Consumer confidence will also be released tomorrow. On Wednesday, we have a light data day with just the MBA mortgage applications released. Thursday will close out July with a major day of data including the quarterly GDP data, Personal Consumption, and the weekly jobless claims. And Friday will be another big day as we get US nonfarm payrolls and unemployment rate in the US for the month of July along with the ISM manufacturing data and US vehicle sales.

I think the upcoming data pose downside risks to the dollar for this week. Given the state of the US housing market, even the dollar bulls just can't be optimistic on the US economy. The data released this week will likely make it all but impossible for the Fed to raise rates any time soon. While the GDP data could end up surprising the markets on the upside, any gains after Thursday's report are likely to prove temporary as Friday's data will reverse any of these gains.

Should be an interesting week! Now on to the big finish:

Currencies today 7/28/08... A$ .9588, kiwi .7449, C$.9811, euro 1.5758, sterling 1.9886, Swiss .9675, ISK 82.35, rand 7.5127, krone 5.1311, SEK 6.0014, forint 146.65, zloty 2.0354, koruna 16.06, yen 107.68, baht 33.47, sing 1.3609, HKD 7.8007, INR 42.455, China 6.8373, pesos 10.08, BRL 1.5780, dollar index 72.70, Oil $124.86, Silver $17.48, and Gold... $932.34

That's it for today... Some pretty bad storms rolled through last night, with lightning and thunder keeping my kids up most of the night. The heat has returned to St. Louis, with the temps expected to be in the mid 90's most of the week. I'm going to really miss the mid 70 degree weather I enjoyed up in Manitoba last week. But now it's time to get back to work to try and pay for that trip! I hope everyone has a great start to their work week and a Marvelous Monday.

Chris Gaffney, CFA

Vice President

EverBank World Markets



Posted 07-28-2008 9:02 AM by Chuck Butler