Who (or What) Is Causing This Dollar Insanity?

By Chris Gaffney, Vice President of World Markets at EverBank



Good Day Currency Traders,

The U.S. dollar continued to hammer the currency markets on Friday. The dollar index climbed all the way back above 76, a level we haven't seen since mid February. The dollar did sell off a bit in early European trading this morning, but it has started to climb again as I write.

Several readers sent me an excellent opinion piece by James Turk that appeared on GoldMoney's website. Mr. Turk points to central bank intervention as a major reason for the recent dollar strength. The article agrees with what I was saying last week.

Right now, the dollar has no fundamental reason to be rallying right now. The reports and news out of the U.S. have not been favorable for the greenback. Also, the United States' twin deficits continue to soar out of control.

Last week, I mentioned that the recent dollar moves smacked of intervention. The dollar only seems to want to move in one direction - up. It looks like the dollar is ignoring the data that would typically send it back down.

Intervention - It's Nothing But a Band-Aid

As my colleague Chuck Butler and I have pointed out in the past, intervention (even cooperative central bank intervention) can only impact the markets for the short-term.

In the end, economic fundamentals will eventually win out, so the central banks have only bought themselves a little time. Unless the economic data in the U.S. does an about face (and I don't expect it to), the U.S. dollar will remain in its long-term downward trend.

On Friday, we all saw more U.S. data that in theory should have moved the dollar lower, but it seemed nothing could touch the dollar last week. U.S. non-farm productivity slowed, increasing at a 2.2% pace vs. last month's 2.6% rate. Unit labor costs came in just under expectations, and wholesale inventories rose by almost two times the expected rate.

Will the Dollar Be Able to Rally in the Face of More Bad News?

This week will bring a number of big economic reports here in the United States. And none of these are expected to be dollar friendly. Tomorrow we will get the Trade balance which is expected to have ballooned back above 60 billion in June. We will also see the monthly budget statement and ABC consumer confidence.

Wednesday will bring us the Import price index in the U.S. along with advance retail sales and business inventories. July Consumer Prices in the U.S. lead off the reports on Thursday, followed by the weekly jobless claims.

And we will close out the week with the empire manufacturing numbers, TIC flows, industrial production, and the capacity utilization numbers for July. If the reports come in as expected, the dollar bulls may start running for the hills.

This should be an interesting week. The data in the U.S. should NOT support the dollar, so we will see if the central banks want to fight the underlying economic fundamentals and continue to prop up the greenback.

I expect the dollar will lose much of its recent strength, but the last two weeks have proved me wrong. So, we'll have to wait and see what a little central bank intervention can do.

Hope everyone has a Marvelous Monday!
Chris