The Dollar Rally is Done…
"When the dollar is rallying it goes up no matter what the data shows, and the opposite is also true. Even the hedge funds were selling dollars. The trading action we saw Friday, confirms to me that this 2005 dollar rally is finally over."
by Chris Gaffney In this issue… - The dollar rally is done
- Wm Duisenberg dies
- Japan data points to a rally
- Rand moves forward
--- Advertisement --- Not sure which currency is right for you? Visit the Currencies Research Center by going to www.dailypfennig.com and clicking EverBank Home, for handy research tools. Or, give the EverBank World Currency Desk a call at 800.926.4922. --------------------- And Now… Today's Pfennig! The Dollar Rally is Done Good day. Chuck will hate that first line, as he is constantly correcting grammar/usage on the desk, but with the combination of the end of July and beginning of Chuck's summer vacation I have to believe the dollar rally is not only done, but is also finished! Looking at the monthly returns, July was good for the currency markets with all of the major currencies up except the Japanese Yen, which was down only .05% versus the U.S. dollar. The rand was the best performer in July with a 4.33% gain, followed by the nordic currencies of Sweden (+3.12%), Norway (+2.61%), and Denmark (+2.2%). The Euro, which was down over 10% for the year, rose just over 2% during the month of July. A confirmation of the end of this long dollar rally came on Friday, when GDP was reported at 3.4% for the second quarter of 2005. This is the ninth straight quarter exceeding 3 percent, something we haven't seen since the Reagan years of January 1983 through March 1986. Adding fuel to what should have been a red-hot dollar rally Friday was San Francisco Fed President Janet Yellen calling for more aggressive rate hikes in the United States. Despite all of this data and talk, the currency markets actually took the dollar down. As Chuck has pointed out in past Pfennigs, when the dollar is rallying it goes up no matter what the data shows, and the opposite is also true. Even the hedge funds were selling dollars. The Commodity Futures Trading Commission reported that hedge funds and other large speculators pared bets on the dollar's gain recently. So the trading action we saw Friday, confirms to me that this 2005 dollar rally, which lasted longer and went further than we expected, is finally over. Sadly, a man many credit with the creation of the Euro, the first ECB President William Duisenberg, died yesterday. Duisenberg was responsible for the introduction of euro notes and coins throughout Europe in 2002 and created a foundation of trust among the population in the euro. Data coming out of the European Union show the economic growth in the region is picking up. European manufacturing expanded in July, adding to reports on business confidence and employment which all signaled a strengthening economy. These latest reports should keep the ECB, which meets this week, from lowering interest rates despite calls from Italian Prime Minister Berlusconi to the contrary. Economists at both Deutsche Bank and Bear Stearns announced this morning that an ECB rate cut would do more harm than good, and economists are now predicting European rates to remain where they are until the third quarter of 2006 when it will start to increase them by .25%. The BOE will also meet this week and a rate cut of .25% is being predicted by most economists. A rate cut was narrowly avoided last month by only one vote, but most economists believe the BOE will cut the rate for the first time in more than two years to spur growth. In spite of this predicted rate cut, currency strategists are expecting the British pound to gain some lost ground back this week due to a short squeeze after the rate cut announcement. Even after the expected cut, the Pound will maintain a nice positive yield advantage to the Euro. We have started to see some signs that deflation in Japan is beginning to dissipate. Japan's wages had their biggest gain in seven months in June, and land prices in Tokyo rose for the first time in 13 years in 2004. Wages rose 1.1% according to a report released today, and land prices in Tokyo rose .4% last year according to another government report released today. The Bank of Japan is becoming more confident that an economic recovery is sustainable because consumer spending is improving at a faster pace and export growth may accelerate later this year, the bank's top economist said. Hideo Hayakawa, who heads the bank's research and statistics department, said, "Japan's economic recovery is becoming sustainable". However, Governor Toshihiko Fukui, agreeing with what our own Chuck Butler said Friday, stated that the bank wouldn't change its policy until it is certain deflation won't return and the economy is expanding steadily. We have reported that the South African Rand is one of the most volatile currencies we deal with, and recent trading patterns continue to reinforce this. While the rand is the worst performing currency vs. the U.S. dollar year-to-date, it was the best performer in July, and continues to strengthen on speculation a growing economy will prevent the central bank from cutting interest rates and reducing the yield advantage. Data released Friday show South Africa's manufacturing output rose to a record in July. The rising price of gold has also helped the rand. Gold rose to a one-month high in London as the dollar weakened. Currencies today: A$ .7617, kiwi .6862, C$ .8217, euro 1.2235, sterling 1.7695, Swiss .7846, rand 6.5678, krone 6.4186, forint 200.35, zloty 3.31, koruna 24.63, yen 111.84, baht 41.57, sing 1.6588, pesos 10.60, China 8.1046, and gold… $431.60.. The metals continue to improve!! That's it for today. As usual, Chuck picked a week when there is a ton of data to be announced to be gone from the desk, so I should have plenty to write about. We will get the ISM manufacturing data out today; Personal Income and Spending, Factory orders, and Consumer Confidence on Tuesday; weekly jobs numbers on Thursday; and then the big monthly employment data on Friday. Throw in the ECB and BOE rate announcements and we should have a busy week! Hope you have a great Monday! |
