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.
Mr. Turk makes a convincing argument. You can read his entire comment here.
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.
This increase in wholesale inventories is somewhat telling. It means that companies could NOT sell all of the goods they produced. Could U.S. consumers finally be slowing their spending? If so, it would mean an even more dramatic drop in GDP for the last half of 2008. |