Dollar Index Posts Weekly Reversal Bottom

After reaching a 15-month low early in the week, the U.S. Dollar closed higher for the week against a trade-weighted basket of currencies. Technically, this closing price
reversal,

once confirmed, often leads to a 2 to 3-week retracement. The daily chart suggests that a move through 77.50 is necessary to turn the main trend to up.

The low for the week for the Dollar was posted shortly after …

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G10 Advancers and Decliners vs USD
	JPY	0.05
	EUR	-0.44
	CHF	-0.53
	GBP	-0.86

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Lower global equity markets are helping to push the U.S. Dollar higher as investors shun risky assets for a second consecutive day. Traders began getting nervous earlier in the
week

after Fed Chairman Bernanke mentioned the level of the Dollar in a speech. This was followed by supportive comments from European Central Bank President Trichet who used a speaking opportunity to

announce his agreement with Bernanke and to try to talk up the Dollar.

The recent pace of the decline in the Dollar has been giving traders a clue that sentiment may be shifting. This shift started at about the same time that China was talking about

changing the value of the Yuan. While China remained hard-nosed about its currency this week when pressed by President Obama to change its ways, speculators were beginning to bet that China would

eventually cave in to international pressure and make a small adjustment in how it pegs its currency.

The combination of comments from Bernanke and Trichet along …

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Euro Traders Sensitive to Efforts to Talk Up Dollar

The U.S. Dollar posted a strong gain versus major currencies on Thursday as investors pulled money out of higher risk assets and sought refuge in the safer Greenback. Recent weak
U.S.

economic data is making traders think twice about buying riskier stocks and commodities at the current lofty levels.

The EUR USD traded sharply lower early in the Thursday trading session but managed to erase …

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G10 Advancers and Decliners vs USD
	JPY	0.04
	EUR	-0.02
	CHF	-0.06
	GBP	-0.21

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The Dollar and Yen gained against the EUR and other higher yielding currencies Thursday on concerns about the sluggish pace of the world economic recovery. A Decline in equity and commodity prices pushed investors back into the USD and JPY as safe haven currencies.

Economic News

USD – USD Gains on Weak U.S Economic Data

The Dollar gained versus the EUR and other higher yielding currencies on Thursday following the release of weak U.S. economic data and a steep drop in global equities. The Dollar index rose to 75.3108 from 75.108 late Wednesday. The Dollar was supported versus other currencies as U.S. stocks fell, following weakness in European and Asian equities. The Dollar tends to have an inverse relationship to moves by equities and commodities throughout the global financial crisis.

The U.S. Labor Department said 505,000 Americans filed initial claims for unemployment benefits in the latest week, unchanged from the previous week and a level considered still too high to indicate payrolls numbers will turn positive in the near term. U.S. leading indicators rose 0.3% in October after a 1% gain in September; signaling the U.S economy might be recovering at a decelerating rate.

Currency movements have been largely confined to recent ranges as the market continues to debate the speed of economic recovery and the direction of U.S. monetary policy.

EUR – EUR Struggling to Rise above $1.50 Level

The EUR and other higher yielding currencies declined Thursday as weakening confidence about the global economic recovery prompted investors to turn to the Dollar and Yen for safety. Disappointing U.S economic data as well as steep drop in equities triggered a decline in demand for risk. Signals from world leaders regarding a more restrictive official stance toward capital flows and currency volatility also contributed to investors' risk aversion. The EUR was at $1.4910 from $1.4960 late Wednesday and at Y132.54 from Y133.73. The Pound was at $1.6651 from $1.6740.

The EUR is struggling to rise above $1.50 and is mainly caught between $1.48 and $1.50 trading levels. Further caution arises from ambivalent signals coming from Federal Reserve speakers about the possible timing of interest-rate hikes as well as the Fed's attitude toward the weakening Dollar.

JPY – JPY Trades Near a Two Week High versus Euro

The JPY traded near a two week high versus the EUR after the biggest drop in global equities this month prompted investors to turn to the safety of the Japanese and U.S. currencies. The Yen traded at 132.80 per EUR early this morning, after climbing yesterday to 131.76, the strongest level since Nov. 3. Japan's currency was at 88.98 against the USD, following a 0.4% gain.

Concerns about the global economy tend to favor the safe-haven Dollar and the Yen, and decrease demand for assets correlated with economic growth such as stocks and currencies from commodity-rich countries. Today the Bank of Japan will conclude its two-day policy meeting, and is widely expected to leave its overnight call rate target at 0.1%.

Crude Oil – Crude Declines on Falling Equities

Crude Oil prices fell Thursday after 4 consecutive days of gains on poor U.S economic data and falling equities. Further pressure came on Oil prices as the Dollar advanced against the EUR, reducing the appeal of commodities as an alternative investment. It appears that U.S. energy demand remains weak while inventories are still high; furthermore, this week's U.S. economic data seems to be pointing to a slower pace of recovery as was previously expected.

Crude Oil for December delivery fell $2.12, or 2.7%, to settle at $77.46 a barrel on the New York Mercantile Exchange; the biggest daily drop since Oct. 30. Equity markets along with Dollar levels have been the dominant and most powerful influence on the oil market in recent months.

Technical News

EUR/USD

The pair has been range-trading for a while now, with no specific direction. The Daily chart's Slow Stochastic providing us with mixed signals. The 4 hour charts do not provide a clear direction as well. Waiting for a clearer sign on the hourlies chart might be a good strategy today.

GBP/USD

The typical range trading on the hourly chart continues. The daily chart RSI is floating in neutral territory. However, the 4-hour Chart's RSI is already floating in the oversold territory indicating that a bullish correction might take place in the nearest future. Going long might be a wise choice today.

USD/JPY

The price of this pair appears to be floating in the over-sold territory on the weekly chart's RSI indicating an upward correction may be imminent. The upward direction on the daily chart's Momentum oscillator also supports this notion. Going long with tight stops may turn out to be a good strategy today.

USD/CHF

The daily chart is showing mixed signals with its RSI fluctuating at the neutral territory. However, the weekly Chart's RSI is already floating in the oversold territory indicating that a bullish correction might take place in the nearest future. When the upwards breach occurs, going long with tight stops appears to be preferable strategy.

The Wild Card

Crude Oil

The Oil prices dropped significantly yesterday, and it is currently traded around $78.45 per barrel. However, the 4-hour chart's RSI is floating in an oversold territory suggesting that a recent downwards trend is loosing steam and a bullish correction is impending. This might be a good opportunity for forex traders to enter the trend at a very early stage.

Article Source: Dollar, Yen Gain on Bleaker Economic Recovery Outlook

Source: ForexYard

Will we keep spending? Of course we will, but not as freely as in the past. Economic data continues to show an economy that is stagnant at best. Today’s data on October housing starts was unexpectedly weak with single-family starts completely reversing a much-vaunted gain in September. Slow activity in construction permits suggests that a renewed building boom is not likely. In a speech Monday, Fed chief Ben Bernanke repeated his mantra that inflation is not a near-term threat, an assertion supported by a rise of only 0.3% in the Consumer Price Index last month. On an annualized basis, CPI fell for the eighth consecutive month in October.

Why, then, are stocks continuing their upward march? One reason is that the weak dollar is making it cheaper for foreigners to invest in U.S. assets. Another is that corporate earnings are holding up better than we thought possible. We remain troubled, however, that so much of the profit margin is a result of layoffs and other cost-cutting rather than sales growth. Sharp gains in worker productivity indicate that business is squeezing more labor out of those who remain on the payroll. Notwithstanding what may be very high long-term costs for this strategy, the S&P 500 is consolidating a breakout of the October peak. Stocks appear set to move higher in the intermediate term.

Anyone who thinks gold can only go up in the presence of inflation may want to re-think that position. The yellow metal set new price records above $1,100 this week. If this were any other market, we would probably say it is overbought, but gold doesn’t always play by the rules. The ten-year Treasury yield ended today at 3.366%, a level it has crossed many times in the last six months. The government is still having no difficulty selling all the paper it wishes at historically attractive rates. Whether buyers will be happy in the long-run remains to be seen.

Sectors

Materials held on to the top sector ranking and distanced itself further from the pack. Technology climbed back into second place and is now #1 on a risk-adjusted basis. Telecom managed to edge back into positive territory but is still on the bottom of the list, with Utilities right above.

Styles

Large Cap Growth increased its lead over the other Style categories, leaving the next six in a virtual tie for second place. Small Cap is lagging and Micro Cap is lagging even more, though the smallest companies did manage to move back into a slight intermediate-term uptrend over the last five days.

International

As has been the case for most of the year, Latin America owns the top spot in our Global Edge chart today. The United Kingdom moved into the second-place slot, helped by a surging British Pound. The U.S., Canada, and developed markets in general are all near the bottom of the list. Other than Japan, however, all are performing well and making strong advances. Japan is a different story: its momentum reading is negative, indicating that it is weak in both absolute and relative terms.

Ron Rowland
Invest With An Edge

312-896-3986.

Click on the link below to view today’s charts and hear Jay’s analysis.

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G10 Advancers and Decliners vs USD
	JPY	0.41
	EUR	-0.55
	GBP	-0.62
	CHF	-0.68

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The U.S. Dollar is trading higher against most major currencies this morning with the exception of the Japanese Yen. Easing in equity, gold and crude oil prices is sending a
signal
to

traders to lighten up positions and book profits after the recent decline in the Dollar. The inability to accelerate the Dollar to the downside is also contributing to the rally. Shorts seem to
have

pulled offers after the down side momentum started to flatten out.

The December Euro failed to take out $1.5000 which came as a surprise to traders. Yesterday’s rally in the Euro following comments from Luxembourg’s Juncker should have given the
Euro

the green light to challenge the high for the year at $1.5063, but when traders failed to print $1.5000 last night, the market turned seller.

The December British Pound is trading weaker. Overbought conditions are contributing to the weakness, but the major concern for traders today is the U.K. economy and the country’s

debt situation. Investors …

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G10 Advancers and Decliners vs USD
	JPY	0.44
	GBP	-0.44
	EUR	-0.51
	CHF	-0.56

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The EUR advanced on the U.S dollar Wednesday, but failed to reach the $1.50 mark as investors zeroed in on a Fed official's comment suggesting key interest rates could remain low until 2012. Federal Reserve officials were quoted saying that the Fed could keep short-term fed funds rates at near-zero until early 2012. The ultra-low rates weigh on the U.S dollar, as investors use the buck to fund investments in higher-yielding assets.

Economic News

USD – Dollar Retreats after 3 Week's Rally

The U.S dollar advanced against the EUR Thursday on speculation U.S. investors are bringing back overseas funds toward year-end and traders cut bets the greenback will weaken. The U.S. currency also gained on speculation traders trimmed short positions after it failed to weaken beyond $1.50 per euro, according to analysts.

The Dollar rose to $1.4938 per EUR from $1.4963 yesterday. The greenback also climbed to $1.6714 per Pound from $1.6749.However the U.S. currency may weaken before a government report today forecast to show manufacturing in the Philadelphia region expanded for a 4th month, boosting demand for higher-yielding assets. The USD is unlikely to advance against the EUR until the Fed signals that it's prepared to increase Interest Rates.

The Federal Reserve Bank of Philadelphia will report today that its economic index rose to 12.2 this month from 11.5 in October, according to economists. A positive reading signals expansion, and may support the Dollar further.

EUR – The EUR Pairs Gains after U.S Weak Data

The EUR pared some gains against the U.S dollar on Wednesday after data showed tame underlying U.S. inflation and a decline in housing starts last month, suggesting a U.S. recovery will be a slow one.

Slow economic growth in the U.S could stall a global recovery, and that can prompt investors to pare risky trades in higher-yielding currencies and assets. The European currency dipped briefly to $1.4839 from about $1.4850, though it remained 0.5% firmer on the day on the view that U.S. Interest Rates will remain low into 2010.

The British pound depreciated for the first time in 5 days against the EUR, weakening 1% to 89.38 pence. The Pound also dropped vs. the U.S dollar 0.4% to $1.6744 today.
The Sterling fell for a 3rd day versus the U.S dollar after the Daily Telegraph said U.K. lenders are in a worse state than those elsewhere, citing the world's largest credit-checking company.

JPY – Yen Advances on Investors' Demand for Safety

The Japanese yen rose against all 16 of its major counterparts as signs that Japan's largest banks are facing pressure to raise funds spurred investors to bring back earnings on assets abroad. Japan's currency strengthened as Asian stocks slipped.

The JPY strengthened against the EUR on speculation European banks will disclose more credit losses, boosting demand for the relative safety of the Japanese. The Yen climbed to 133.10 per EUR from 133.64 yesterday. It advanced to 148.90 per Pound from 149.58, after earlier rising to 148.78, the highest level since Nov. 12.

Crude Oil – Oil Rallies for a 3rd Day on Weak Dollar

Crude Oil prices rose for a third consecutive session, as government data showed a surprise drop in U.S. crude inventories and as the U.S. dollar turned lower, lifting dollar-denominated commodities prices.

Crude inventories fell modestly last week as imports declined and demand ticked up, the Energy Information Administration's (EIA) petroleum data showed Wednesday. The weekly EIA data also showed U.S. crude imports fell 0.9% to 8.58 million barrels a day, and total petroleum demand rose 1% to 18.5 million barrels a day. While demand was higher than a week ago, it's still down by more than 2% from a year ago.

Also supporting Oil prices, the U.S dollar weakened after a report showed new U.S. home construction slowed much more than forecast last month, while consumer prices rose more than expected. Crude oil prices are denominated in U.S. dollars, so a weaker dollar makes the commodity less expensive for investors holding other currencies. In addition, commodities have benefited from a dollar carry trade, whereby investors borrow cheap dollars to invest in hard assets.

Technical News

EUR/USD

The daily chart is showing mixed signals with its RSI fluctuating at the neutral territory. However, the hourly chart's RSI is already floating in the oversold territory indicating that a bullish correction might take place in the nearest future. When the upwards breach occurs, going long with tight stops appears to be preferable strategy.

GBP/USD

There is a fresh bullish cross forming on the 4-hour chart's Slow Stochastic indicating a bullish correction might take place in the nearest future. The upward direction on the hourly chart's Momentum oscillator also supports this notion. Going long with tight stops might be the right strategy today.

USD/JPY

The typical range trading on the hourly chart continues. The 4-hour chart's RSI is floating in neutral territory. However, the weekly Chart's RSI is already floating in the oversold territory indicating that a bullish correction might take place in the nearest future. Going long with tight stops may turn out to be the right choice today.

USD/CHF

The pair has been range-trading for a while now, with no specific direction. The Daily chart's Slow Stochastic providing us with mixed signals. All oscillators on the 4 hour chart do not provide a clear direction as well. Waiting for a clearer sign on the hourlies might be a good strategy today.

The Wild Card

Gold

Gold prices rose significantly in the last month and peaked at $1141.25 for an ounce. However, the daily chart's RSI is floating in an overbought territory suggesting that a recent upwards trend is loosing steam and a bearish correction is impending. This might be a good opportunity for forex traders to enter the trend at a very early stage.

Article Source: Dollar Falls on Fed Official's Rate Comments

Source: ForexYard

312-896-3986.

Click on the link below to view today’s charts and hear Jay’s analysis.

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Dollar Loses Ground to Euro, but Finishes Mixed Versus Others

The EUR USD posted a sizable gain. Tuesday’s supportive comments from European Central Bank President Trichet were not enough to stop the Dollar’s slide today. Matters weren’t
helped

after Luxembourg premier Jean-Claude Juncker said that the Euro’s rally hasn’t hurt the Euro Zone recovery. This comment gave traders the green light to drive the currency higher. If upside
momentum

continues at the current pace, we could …

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G10 Advancers and Decliners vs USD
	CHF	0.70
	EUR	0.66
	JPY	-0.16
	GBP	-0.35

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Housing Starts Fall Unexpectedly; Treasuries Could Benefit

This morning it was reported that the Core CPI rose 0.3% while Housing Starts fell 10.6%. Treasury futures are trading a little lower after the news. A higher CPI number will be
an

indication of inflation which helps push interest rates higher. This will put pressure on the December Treasury Bonds and Treasury Notes. A sharp sell-off in the equity markets could trigger a
flight

to safety rally in the Treasuries. Both of these scenarios are possible today which means a two-side trade is likely. Watch for volatility. The surprise drop in the housing starts could support
the

Fed’s notion for interest rates to remain low for a prolonged period of time.

U.S. Equity futures are trading sideways to lower after an attempt to reach a new high for the week overnight failed. December E-mini S&P 500 futures made a high this week at

1112.00. A breakout above this level could trigger a sharp rally to …

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G10 Advancers and Decliners vs USD
	EUR	0.20
	CHF	0.19
	JPY	0.14
	GBP	-0.01

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Comments by Fed Chairman Ben Bernanke surprised many investors as he joined the rallying cry for a stronger Dollar, which may lead to strength for the USD in the days ahead. On the other hand, the USD still faces downward pressure from sudden spikes in risk appetite following positive news reports as its safe-haven status has not yet diminished. After last week's drop in consumer confidence, safe-havens like the USD and JPY have begun to regain some of their strength.

Economic News

USD – Bernanke Statements Diminish USD in Short-Term; Strength Ahead?

Following the USD's minor slide in yesterday's trading, it appears the greenback has started to regain some of its previously lost ground, but the market is still shaky. The Dollar spent most of yesterday's trading gaining ground on the EUR and JPY, hitting levels of 1.4807 and 89.52 respectively. By the end of the trading session however, the USD had reversed course and started losing against its primary rivals.

Comments by Fed Chairman Ben Bernanke surprised many investors as he joined the rallying cry for a stronger Dollar, which may lead to strength for the USD in the days ahead. On the other hand, the USD still faces downward pressure from sudden spikes in risk appetite following positive news reports as its safe-haven status has not yet diminished.

As the US prepares to enter its holiday shopping season, retail sales will become a major factor in currency valuation through the last half of November and the entirety of December. Traders should take note of these reports in the weeks ahead as they will drive the market during this time of year.

Looking at today, forex traders have two primary reports from the United States which will be released simultaneously at 13:30 GMT. The first is Building Permits which will reveal the status of a portion of America's housing sector. The second is the monthly CPI data, which highlights the level of inflation among consumer prices over the previous month. Today may be a volatile trading day due to these reports as well as the release of Britain's monetary policy statement a few hours earlier.

EUR – EUR Bearish following Consumer Confidence Drop

The 16-nation European currency appeared to be on the downside in recent trading after statements from a number of central bankers called for a strengthening of the US Dollar. Interest rates do not appear to be getting raised by many banks in the nearest future, and this news has helped keep downward pressure on the European currencies while bankers strive to boost economic growth.

The EUR weakened as far as 1.4807 against the greenback, while also dropping below 132.50 against the Yen. This latest weakness may simply be highlighting the return of risk aversion in the market following last week's drop in consumer confidence and major trade balances.

Britain's Monetary Policy Committee (MPC) is due to release the Minutes from their recent policy meetings later this morning. Results are expected to show little change from Mervyn King's statements a week ago regarding steady interest rates and the option for further bond purchases remaining open. Britain's central bankers have hinted that their economy is not growing as they would like, and measures are being left on the table to combat any additional weakness.

As for other reports today, European Central Bank (ECB) president Jean-Claude Trichet is set to speak at a relatively less significant meeting on insurance and occupational pensions in Frankfurt. While it should not be a volatility-creating event, the possibility remains open for some movement following his statements.

JPY – JPY Gaining from Rising Risk Aversion

With a surge in risk aversion, the JPY appeared to be a growing favorite in recent trading. Climbing as high as 132.44 against the EUR and 82.47 against the AUD following trade liquidation, the Yen may be poised for further strength against these currencies without any significant news to correct this recent behavior.

After last week's drop in consumer confidence, safe-havens like the USD and JPY have begun to regain some strength. With the holiday season in Europe and the United States approaching, the possibility remains that this strength may drop as investors pull money out of safe-havens to purchase holiday gifts, but this movement may not reflect true market conditions, only short-term cosmetic changes.

Crude Oil – Oil Prices Defy Strengthening USD, Breach $80

The price of Crude Oil climbed back above $80 a barrel in today's early trading hours despite the sudden rise in USD strength. Speculators view the sudden increase in risk aversion to be a signal that commodity prices will continue rising as a hedge against inflation. Gold prices are still climbing, and even Silver has broken through its significant psychological price level of $18 per ounce.

With commodity prices climbing, Crude Oil appears set to maintain its current price level, with the option to go even higher as the northern hemisphere prepares for the winter months ahead. Supply remains in doubt and demand still appears weak, but speculators continue to assume that oil prices are going to rise which suggests optimism for further industry growth going into 2010. Investors will have to wait and find out if these speculators were right in their assessment.

Technical News

EUR/USD

The hourly chart displays the Relative Strength Index trading in the over bought zone, potentially signaling a downward price movement. The chart's Bollinger Bands are also tightening, indicating the potential for an imminent breach of the bands. Traders may want to be short on this pair.

GBP/USD

The Cable's hourly chart shows a move that began from the pair's lower Bollinger Band and has the potential to climb to its upper Bollinger Band. A limit order to take profit may be preferred at the pair's upper Bollinger Band price level of 1.6835. This price level may also be preferred to enter the market with an entry limit sell at the same price.

USD/JPY

The USD/JPY 4-hour chart and hourly chart shows a tightening of the pair's Bollinger Bands, indicating the potential for an imminent breach. The hourly also shows a short term trend that began at the pair's upper Bollinger Band, crossing the 20 day average line. This run could have the potential to reach the pair's lower Bollinger Band. Traders may be inclined to take a limit order at 89.08 or enter long at the same price level.

USD/CHF

Yesterday the pair showed bullish strength, touching a significant resistance level of 1.2007 and then reversed course. The hourly chart displays a tightening of the pair's Bollinger Bands, indicating the potential for an imminent breach. The chart also shows the pair's Relative Strength Index floating in the oversold zone. This may show the pair could be in for another upward price move. Traders may want to be long on this pair today.

The Wild Card

Wild Card – Gold

Gold touched a new high yesterday of 1143.15, though the charts are showing bearish trends today. The daily chart displays a bearish cross has formed on the commodity's Slow Stochastic Oscillator, indicating for a potential downward price movement. Further evidence of a potential downward correction could be supported by the pair's Relative Strength Indicator trading in the overbought zone. This could give commodity and forex traders a reason to go short on gold today.

Article Source: Dollar, Yen Up on Increased Risk Aversion

Source: ForexYard

Dollar Manages to Hold on to Gains

The U.S. Dollar managed to close higher today despite late session attempts in New York to erase earlier gains. This is strong evidence that most of today’s rally was due to

short-covering rather than fresh buying. Comments from ECB President Trichet were supposed to show support for Bernanke’s comments from yesterday, but actually helped ignite the rally in the
Dollar.

Technically, the Dollar is oversold on the daily chart. This …

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Click on the link below to view today’s charts and hear Jay’s analysis.

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Bloomberg Radio asked me last week what I would like to hear from Federal Reserve (Fed) Chairman Bernanke to support the dollar. I responded he had done enough talk, and that I would like to see some action. Indeed, as Bernanke spoke at the Economic Club in New York on Monday, the dollar rallied for a few seconds when his speech was released; in it, Bernanke said, “our commitment to our dual objectives [price stability and full employment] … will help ensure that the dollar is strong…” The reason the dollar rallied was because initial media reports suggested the Fed will ensure the dollar is strong, whereas all Bernanke had said is that the Fed is committed to its dual mandate and, as a result, the dollar should be strong.

Let’s look at the action, then. The Fed has been buying hundreds of billions worth of government bonds and mortgage-backed securities (MBS) by printing dollars – not currency in circulation, but virtual dollars by entering a few keystrokes on the Fed’s computers; in Fed talk, we talk about an expanded Fed balance sheet, as the size of the Fed’s balance sheet represent the dollars that have been “printed”. Generally speaking, when you increase the supply of something – be that gadgets or dollars – the value of any one gadget – or dollar – should fall assuming constant demand. Our interpretation – Fed actions do not support a strong dollar.

What may support a strong dollar is if an “exit strategy” were implemented, not merely discussed. A true exit strategy would be to shrink the Fed’s balance sheet again, to get rid of all those securities and replace them with nothing. Instead, for now, the Fed’s exit strategy seems to be about reducing the rate at which it is printing money to purchase additional securities. For those to whom the Fed balance sheet is an abstract concept, think of it as super-money from which all credit originates. A dollar printed by the Fed can multiply by up to a factor of 100 by the time it has worked its way through the economy: a bank may lend about ten times more than it has in reserves; the recipient of the loan then deposits the money; the depositor bank then turns around to makes new loans based on the fresh deposit, and so forth.

The Fed’s action to weaken the dollar goes beyond printing money. By printing money to buy MBS and government bonds, interest rates may be low, but these securities are now intentionally overvalued; rational investors – not just foreigners, but also domestic investors – may be inclined to take their money overseas in search of less manipulated returns. Our interpretation – Fed actions do not support strong dollar.

What may support a stronger dollar, in this market environment, sounds evermore like a novel concept: let the market determine the price of securities. Indeed, if we allowed market forces to play out, the credit contraction could run its course, may induce more consumer savings and push up the dollar.

Talking about low interest rates: a policy to keep short-term rates near zero is, in our humble opinion, not action that supports a strong dollar. A strong dollar policy would, in our view, include higher interest rates.

Let’s talk about what the one trump card U.S. policy makers have been talking about: the current account deficit is shrinking. Indeed, over the past year, the U.S. current account has been coming down from what we believe had been unsustainable extremes. The current account deficit is exactly the amount foreigners need to buy in U.S. denominated assets to keep the dollar from falling; every day, foreigners need to buy about US$2 billion, just to keep the dollar from falling. It would be laudable to have a shrinking current account deficit if it came from a policy that fostered savings and investment. However, when the current account deficit shrinks because our imports are plunging (recession) and because consumers simply can no longer run up their credit cards and extract money from their homes, it sounds more like a disease policy makers haven’t found a cure for, rather than a policy shift. Indeed, as some of the reflationary efforts are starting to work, the trade deficit – a key component in the current account deficit – is rising once again. Aside from the trade deficit, external financing requirements, in particular to finance government debt, factor into the current account deficit. Indeed, the best ways to promote a strong dollar over the long-term may be to institute policies that foster savings and investment. How about:
• Allowing corporations to expense capital investments rather than requiring them to amortize them over years, in some cases decades. Fostering investments may help the dollar; a cash for clunkers program is foremost expensive.
• Raising interest rates to reward saving;
• Reducing or simplifying regulation in all industries to encourage investment.

Instead, the “incentive” for foreigners to invest in the U.S. is that the dollar has fallen so far that there may be bargains to be had. That sounds like offering your children candies as a reward for brushing their teeth, not exactly the recipe for healthy teeth in the long-run. There are many more ways in which tax and regulatory policies could foster savings and investment. In practice, we may hear a politician talk about the need for greater savings, but it invariably never progresses: after all, every politician wants the spending to happen now, and the saving later, to boost short-term growth.

Furthermore, we can’t help but conclude that the Fed is mostly interested in boosting short-term growth. That’s not surprising: when a country has a current account deficit, economic growth is the typical way to attract capital from abroad. But how about actively working on a more balanced economy that isn’t as dependent on inflows from abroad? Japan and the Eurozone are two areas with economies that are roughly in balance; as a result, an economic downturn does not automatically lead to a weaker currency. Instead, Fed policy all decade long has been fostering global imbalances rather than stemming against them. This all should have ended with the credit bust last year; unfortunately, policy makers appear to want an alternative ending to the drama; it is our fear that to achieve a happy ending, we need to change course rather than reflate what got us into trouble in the first place.

Let’s shift gears and talk about fiscal spending. The absolute level of government debt is a bad predictor of exchange rates; instead, prices are set by marginal buyers and sellers, cash flow items. As such, as deficits soar, financing requirements to pay for interest soar as well. By shifting to what may be the equivalent of an adjustable rate mortgage for government debt, the government has been able to keep its interest expenses at an artificially low level. In recent weeks, the Treasury has embarked on a major effort to extend the duration of government debt, realizing that it may be imprudent to refinancing trillions in the very short-term markets. An increase in supply of long-dated Treasury Bonds may push up long-term borrowing costs. The higher cost of borrowing may encourage the government to spend less – here we go, that would be a plus for the dollar. There’s a debate on whether a potential gridlock in Congress at the mid-term election would reign in government spending. Unfortunately, any such gridlock is likely to affect only discretionary spending; as a percentage of the overall government budget, discretionary spending has been declining over the years. Said differently, we are not optimistic that fiscal spending is going to be contained anytime soon. Because of the daunting challenge, policy makers seem to favor inflationary growth policies; regardless of political persuasion, we do not see how either the Democratic or Republican party is truly proposing policies that support a strong dollar.

What about individuals? Aren’t consumers to blame for the mess we are in? Some believe U.S. consumers are wired to run up their credit cards to shop, shop, shop. Genetically, U.S. consumers are no different from others in the world; sure, habits are hard to break – just as Japan has lost a generation of consumers. However, ultimately, consumers react to policies. When you flood the market with cheap credit, consumers will likely take the bait; the only reason why they aren’t right now is because money is only reaching those with pristine credit. But that hasn’t stopped policy makers from trying.

This analysis is not intended as a mere bashing of policies. We would like to illustrate that it is possible to have policies that encourage a strong dollar policy. The U.S. dollar has become the world’s reserve currency because, over many decades, the U.S. pursued more prudent policies than many other countries. In the meantime, it is in no one’s interest to have a weak dollar. But policy makers abuse that position and impose policies that may push a lower dollar on the rest of the world. There is only so much that the rest of the world can absorb. The fruits of the weak dollar policy may include a lower standard of living, a greater wealth gap, inflation and a rather unstable U.S. and global economy. That’s a high price to pay, even when paid in today’s depreciated dollar.

The ultimate strong dollar would be one based on a gold standard or modern variation thereof. Recent actions are a stark reminder that when you give the government the power to inflate, it invariably becomes the most politically convenient solution to solve the day’s problems.

Axel Merk
President and Chief Investment Officer, Merk Investments

G10 Advancers and Decliners vs USD
	GBP	-0.24
	JPY	-0.41
	EUR	-0.90
	CHF	-1.08

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The U.S. Dollar is trading higher overnight based on oversold technical conditions. Yesterday’s comments from Fed Chairman Bernanke regarding the Dollar may also be triggering a

short-covering rally as well a position-lightening. The overnight action has not been sufficient enough to call for a change in trend.

Yesterday, Bernanke expressed concern for the Dollar, which was a surprise to some since the Fed Chairman rarely talks about the U.S. currency. In his speech, he said he remains

committed to a strong Dollar like the Treasurer usually says, but he failed to come up with a strategy to boost the greenback. In addition, he talked about interest rates remaining “exceptionally

low” for “an extended period”. It’s hard to believe that the long-term down trend will change for the Dollar given that interest rates are expected to remain low.

The short-term trend may reverse temporarily because traders usually get nervous whenever a central bank official talks about their currency. This usually leads to counter-trend

trading as investors reel …

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Asian-Pacific Nations and Bernanke Comments Drive U.S. Dollar Lower

The U.S. Dollar finished lower against all major currencies today. The down move was triggered by comments from high ranking individuals including Fed Chairman Bernanke and a
Chinese

banking official.

Federal Reserve Chairman Bernanke said late Monday morning that the Fed is likely to keep interest rates exceptionally low for “an extended period.” These three words helped push
the

Dollar to a …

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Click on the link below to view today’s charts and hear Jay’s analysis.

forexblog@brewerfx.com

DISCLAIMER: Forex (off-exchange foreign currency futures and options or FX) …

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G10 Advancers and Decliners vs USD
	JPY	0.47
	GBP	0.29
	CHF	0.03
	EUR	0.02

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G10 Advancers and Decliners vs USD
	GBP	0.63
	JPY	0.22
	EUR	0.15
	CHF	0.14

Read More …