Friday, July 07, 2006

 

US$ Rate Support 'At An End': Updated

Bloomberg reports on what moved the currency markets this morning. "The U.S. economy added fewer jobs in June than economists forecast, reducing the urgency for further Federal Reserve interest-rate increases even as wages rose the most in five years. Treasury yields and the dollar declined as traders speculated the report reduces the chance of a tightening in August."

"At the same time, investors still judge a move more likely than not, because wages are climbing and inflation is picking up."

"'The Fed is going to zero in on the wage component,' said economist Stuart Hoffman. In spite of the 'disappointing payroll number, this still adds up to a 25 basis point increase in August,' he said."

"The U.S. currency dropped to a four-week low against the yen and euro after a government report showed U.S. job growth in June fell short of economists' forecasts. The dollar dropped to 114.04 yen at 5:11 p.m. in New York from 115.11 yen yesterday, reaching the lowest since June 9. It weakened to $1.2810 per euro from $1.2782 yesterday, touching the lowest since June 6."

"'The days of 'rate support the dollar has enjoyed are near an end,' said Samarjit Shankar, director of global strategy for the foreign exchange group at Mellon Financial Corp. 'The focus is going to shift' to expectations for rate increases by central banks in Japan and Europe, he said."

"Yen gains started in Asian trading as China's currency climbed to its strongest since last year's revaluation. 'It's a superstitious market getting twitchy about the possibility of a major yuan development,' said Shahab Jalinoos, head of Asian currency strategy at ABN Amro Bank NV in Singapore. 'All Asian currencies will gain in this scenario, including the yen.'"

"China's currency climbed today on speculation the nation's central bank will hold an emergency meeting to discuss widening the yuan's trading band."

"The dollar has fallen 7.6 percent against the euro and 3.2 percent against the yen this year in part on speculation central banks in Europe and Japan will raise interest rates more than the Fed. 'The Fed is going to stop raising rates long before the ECB does,' said Jack McIntyre, part of a team that oversees $15 billion of international debt at Brandywine Global Investment Management in Philadelphia. 'That does put some risks in the U.S. dollar.'"

"Gold futures closed lower Friday, as traders locked in some of the metal's recent gains, shrugging off a disappointing June nonfarm payrolls report that sent the dollar sharply lower against major currencies. Gold for August delivery closed down $1.50 at $634.80 an ounce on the New York Mercantile Exchange. Despite the losses on Friday, gold gained 3.1% this week."

"Silver ended down 18.0 cents at $11.405 an ounce, platinum was down $5.90 at $1,243.7 an ounce and palladium dropped $1.70 at $329.15 an ounce."

"Gold and the other precious metals didn't find 'significant upside traction with initial gains in both running into end-of-week profit taking,' said James Moore of TheBullionDesk.com. 'Chart resistance around $635 is proving a tough nut to crack for the moment and could suggest some further base building is required before pushing higher,' Moore said."

From Forex TV. "Federal Reserve vice chairman Donald Kohn said the US central bank must heed the lessons of the 1970s by keeping inflation and public expectations about inflation in check. Kohn said the US central bank had a key role to play in reassuring the American public that their spending power would not erode 'unexpectedly.'"

"'As long as inflation expectations remain contained, relatively faster growth of the prices of imported goods for a time would be associated with only a temporary bulge in inflation and would result in a needed change in relative prices,' Kohn said, in remarks released by the Fed in Washington."

"'The lesson from the 1970s, however, is that an unchecked or permanent increase in inflation would only feedback adversely on demand for dollars,' Kohn said. 'Such an unmooring of the anchor of price stability could only elevate the odds on abrupt changes in interest rates and asset prices, instability in the US economy, and disorder in global adjustments,' he said."

Comments:
I guess an 'expected' drop in purchase power is ok.
 
the only way to protect purchasing power is to have a gold or silver standard.
 
If rate support is at an end, then these days will go down in history.
 
Yes, this is history in the making; the end of the USD as the world reserve currency. Of course, the sun also finally did set on the British empire. Nothing lasts forever...except gold.
 
Ben,

Isn't it amazing that all these macro events are more or less presaged on your blogs??
 
TJ,

I chalk that up to the fact that blogging lets us follow this stuff everyday. It's really out there for all to see, but blogs let groups of people follow and discuss the information in real time.

Like the HBBlog, we all make observations on the data as it flows and because of all the great contributors and experiences, we reach a better understanding.
 
The big question I have isn't whether or not the dollar's day is past, its "how will it end?"

Will we see a slow erosion of purchasing power, or will we see (at some point) true panic set in?

Central banks are already taking precautions against the latter with the new Basel protocols, but that doesn't mean it won't happen.
 
"Will we see a slow erosion of purchasing power, or will we see (at some point) true panic set in?"

All it takes is one triggering event. If I had to bet, I'd go with 3 or 4 hedge funds going belly up during a market downturn, leaving their derivatives as worthless paper. There's no central bank prepared for that event.
 
soho, the Fed hopes for a slow USD decline. That is the best-case scenario. Worst case is, well, much worse. I expect panic at some point.
 
Given the fact that we've already had a fairly moderate ongoing erosion of purchasing power (compared to other currencies), it's more of a question of how much faster will it occur now. We'll have to see how much "global competitive devaluation" ends up kicking in as other countries fight to preserve their export markets.

Luckily we have an easy gauge to watch -- the price of PMs!
 
What's the general consensus here about the course of PM over the next few months? We're evidently in the start of a correction up. Will this continue? Or will this correction top out at what one analyst has termed "the shorting opportunity of a lifetime" and decline heavily until fall? I'm still dollar averaging, but I wanted to get the learned individuals opinions on the matter.
 
http://www.pimco.com/LeftNav/Late+Breaking+Commentary/FF/2006/FF+July+2006.htm

an interesting article on two thoughts of economic analysis and a little discusstion on greenspan and bernanke. Interesting last sentence.
 
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