"Everything popular is wrong."

- Oscar Wilde

Issue #190: Thursday, May 8, 2008

"A Strong Dollar? I'll Believe It When the Euro Costs a Buck!"

Today's commentary is by Chuck Butler, President of EverBank World Markets.

Good day Currency Traders!

Boy, when I said yesterday the Fed Head Hoenig threw a cat among the pigeons, I meant he threw a HUGE cat among the pigeons. Today, this one Fed Head's statements have sparked currency movements around the world.

The euro lost more ground yesterday than it has since the dollar propping days of 2005. The Big Euro Dog took a beating, so all the little dogs of the currency world stood in line for a beating too. Even the Chinese renminbi got taken to the woodshed!

However, one currency player managed to avoid it all. The Japanese yen skirted the sell off in currencies as stocks were sold. More on that in a minute...

Some Good News if You Get Your
Currency Trades from The New York Times
(Which I Don't Recommend)

The New York Times said yesterday that "After six years of stumbling against the euro, the dollar may be showing signs of getting back on its feet." So, hey! If the NY Times said it, we might as well throw in the towel, eh? NOT!

The story goes on to tell us that the Fed's signal to pause in rate cuts last week is the reason for this change in dollar sentiment. A former Fed Head, and Chris Gaffney's old economics professor, Larry Meyer had this to say...

"The decline of the dollar is a factor weighing on the Fed that makes them more reluctant to continue easing interest rates."

Okay, so the Fed may pause with rate cuts. Does that really change the rest of the awful fundamentals hanging over the dollar like the Sword of Damocles? I don't think so!

Spender of Last Resort

The Fed is now giving away cheap money to securities firms. And they're playing “chicken” with your life savings. The bet? That they can stabilize financial markets before they devalue your dollars to less-than-worthless.

Collapsing markets? Collapsing dollars? Or both?

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Back in 2005, the Dollar Bulls Mocked the Bears -
and Then the Dollar Plummeted

But, I will say this: We've seen this sentiment shift before. It was back in 2005. The media jumped on the bandwagon that the weak dollar trend was over. (Well actually, these guys wouldn't know a weak dollar trend unless I told them that's what it was!)

I remember that year. At the time, I was inundated with nasty emails telling me how wrong I was about the falling dollar.

But I stuck to my guns, and discovered the dollar props, like corporate amnesty tax for foreign profits and Fed rate hikes. I also warned that once you took these dollar props away we would return to the underlying fundamentals that said the dollar should be weak. I suspect that's what we'll see this time around too.

I was talking to the Big EverBank Boss, Frank Trotter yesterday. This doesn't happen very often because we're both so busy all the time. He said something like, "the media thinks we have a strong dollar again."

I said... "I wouldn't consider the dollar to be strong until the euro is back to parity!"

So, here I am out on the limb again. But don't worry, I've picked out a big strong limb to support me. I'm sticking to the fundamentals. I'll take a lot of flak out here, but I'll not come down and give in to the media.

Speaking of the media, in this Sunday's (Mother's Day) edition of The New York Times, you'll find a New York Times Magazine article with an interview from me. Should be interesting, especially now that the NY Times has printed the story I talked about above!

Another Carry Trade UNWINDING -
Happening Right Before Your Eyes

Stocks sure have taken it on the chin this week. I've been saying for weeks that I thought this stock rally was a house of cards. But, then I'm not even your last choice as a "stock guy."

Analysts said oil will hit US$200 by this week next year. The thought of US$200 oil, along with financials selling like Pet Rocks, didn't sit too well with the overall stock market. Oil did hit US$123.53 yesterday. Oil is now up 29% for the year and oil has more than doubled its level of 52 weeks ago. Ouch.

With stocks selling off this week, the carry trade has started to come undone once again. That's good news for the Japanese yen and the Swiss franc - which had been suffering as the carry traders rushed back into the market.

This carry trade on again, off again drives me crazy! I used to say it was like Wayne and Garth's hockey game: Game on...game off. But it's not even funny any longer. Let's hope this time it's going away for good.

Some more food for thought: If stocks sell off, what are the foreigners going to buy to finance the deficit? We'll have to wait and see.

Have an Excellent Thursday!

Chuck Butler, President
EverBank World Markets
www.everbank.com

EDITOR'S NOTE: Let's assume for just a moment that the talking heads have their day in the sun and the dollar rallies. What does a strong dollar mean? It just means you have the opportunity to use any short-term weakness to stock up on more foreign currencies. With a strong dollar, you can buy foreign currencies on the cheap - and get more bang for your buck. Then when the dollar does head south again - and it will - you're in the perfect position to benefit with the strongest currencies to rise again. Click here for our long-term projections on the buck.

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Making 'Cents' of the Headlines

What Happened:

Today, the European Central Bank (ECB) and the Bank of England (BOE) announced that they're leaving well enough alone. The two major leaders of European finance have decided to leave their rates unchanged - at 4% and 5%.

What We Say:

These decisions didn't really surprise anyone. Everyone and their brother in the currency markets expected the ECB to hold rates steady today. That's because the ECB's Jean-Claude Trichet has chattered almost non-stop about how they're fighting inflation, at the expense of the slowing economy.

And the BOE has had good fortune in the past when they follow their little brother euro's lead. So the BOE also decided to hold rates steady. Also, according to The Wall Street Journal, the BOE is still trying to balance the pressure of rising costs and economic growth.

So the euro and pound continue to enjoy a nice interest rate differential to the dollar, but at what cost in slower growth for the Eurozone? This points to a stronger U.S. dollar in the short run. The euro is getting battered for their stubborn stance. And the pound has already taken a beating. These days the dollar tends to react in the exact opposite direction of the euro, so a weak euro is some good news for the dollar.

However, as Chuck Butler said above, the long-term fundamentals for the dollar are less than appealing. So if you see the dollar rising in the next couple weeks, don't sweat it. It's just a small blip on the dollar radar screen. Nothing more.

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