The Dollar Swings a Mighty Hammer

"The currencies got ambushed in the United States. Simply amazing to me, simply amazing… That people who should know better, would get all caught up in these lies, and videotape!"

by Chuck Butler

In This Issue…

• ADP jobs reports lights up the dollar!
• Be careful betting on ADP….
• BOE and ECB meet today…
• Freezing mortgage rates…

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And now…today's Pfennig!

The Dollar Swings A Mighty Hammer!

Good day… And Happy St. Nick's Day to you! Well… The dollar grabbed the hammer yesterday and swung mightily at any currency in its path. I'm not understanding this dollar strength, folks… And wait until you hear what lit the fire under the dollar yesterday!

See… You didn't have to wait long there did you! Yesterday morning, the ADP jobs report printed… And while we don't normally even pay attention to this print, this one grabbed the markets' attention. In the past, the ADP report normally gives us a pulse check on the Jobs Jamboree, which prints tomorrow. So, when this month's ADP report printed a gain of 189K versus 50K forecast, it set the wheels in motion for the markets to get all lathered up about the Jobs Jamboree…

ADP also doesn't calculate government jobs, which normally run about 20K a month… The markets immediately got so lathered up over this report that they started changing their forecasts for the Jobs Jamboree, and saying it could be as high as 210K! So… If jobs are soaring… Then all of this bad stuff is just a dream, and all is right in the United States! NOT! But that won't get in the way of this "feel good" story…

I have to say one thing though… ADP uses the same birth/death model that the Bureau of Labor Statistics uses, which automatically voids this report in my mind. You see even the BLS admits that the birth/death model exaggerates the wrong way when cycles turn.

And the ISM non-manufacturing (service sector) Index fell yesterday, and their jobs portion of the index fell to just above the expansion level of 50, to 50.8… So, the ISM doesn't agree with ADP either…

But, as I said, this information was quickly swept under the rug, and those that were betting on a 50 BPS cut from the Fed next week, quickly removed those bets, and bought dollars… And stocks thought this news was just marvelous, but then they thought bad employment numbers were marvelous too, which means… carry trades went back on yesterday!

So… Just like a couple of weeks ago, when the dollar got ambushed in Asia… The currencies got ambushed in the United States. Simply amazing to me, simply amazing… That people who should know better, would get all caught up in these lies, and videotape!

The euro (EUR) fell through the 1.46 handle very quickly, and by the end of the day was staring at losing that figure all-together! Then overnight… There it was… euro 1.4585, right there before my eyes! There was not one currency that escaped the dollar's wrath… It's been a long time… Now I'm coming back home… I've been away now, oh how, I've been alone… I can hear the dollar singing this old Beatles' tune… And yes, it has been some time now since the dollar really grasped the dollar tight.

The euro might receive some love today, as the European Central Bank (ECB) meets to discuss rates… The ECB is seeing rate cuts being suggested all around them, but will stay steady at the wheel, I believe. And if ECB President, Trichet, talks tough about inflation, then I think we'll see the euro bounce back.

The Bank of England (BOE) also meets this morning, and will announce first… The BOE is ready to cut rates, but I'm sticking to my call that they will postpone that rate cut another month… Unfortunately, the markets have already discounted a rate cut, and marked down sterling (GBP).

The Reserve Bank of New Zealand left rates unchanged last night, and in explaining why, Central Bank Governor Bollard said that, "inflationary pressures have increased and interest rates are now likely to remain around current levels for longer than previously thought"… That's the kind of talk you like to hear from a Central Banker… Not, this weak knee stuff the Fed throws at us… "Ooh, we better cut rates to make the markets happy, we don't want to upset the applecart" OK… You should have heard me saying what I was typing… Good thing no one was around! Go ahead try it… In falsetto too!

Well… Folks… Here's the skinny on Treasury Secretary Paulson's "silver bullet"… Federal regulators and U.S. lenders agreed to freeze interest rates on subprime mortgages for five years yesterday… So, while those that need the interest rates frozen to help them out will praise the government for stepping in… I'll take the other side of that thought and tell you now, so you can hear me later… Once again, we see the government getting involved in the private sector.

OK… Remember last week, I told you about the next shoe to drop on the mortgage meltdown? I told you that the mortgage insurers, like AMBAC and MBIA would be the next to take on water from mortgages that were put back to them so the holder could collect the insurance… Well… Yesterday it was announced that Moody's had reassessed the probability that bond insurer MBIA would suffer a capital shortfall and concluded that the risk had risen and was "somewhat likely". Capital impairment of MBIA, which insures $652 billion state, municipal and structured finance bonds, could lead to the company being downgraded, which could result in massive losses for investors in the bonds MBIA backs.

The dark storm clouds keep forming on the horizon folks… It's not a question of whether they will miss us… It's a question of when they will begin to dump on us… And news like this leads me to believe it's beginning to sprinkle.

And the clerks taking fees at the Taj Mahal have started turning down dollars as payment into the museum… This is a first! Just chalk this up to another diss on the dollar, right in line with Giselle, and Jay Z!

Gold got hammered yesterday by the dollar too… The shiny metal took one to the chin and never recovered on the day… All on this "smelly" ADP report. What happens if the Jobs Jamboree that prints tomorrow, doesn't reflect the ADP figures? Do we turn around on a dime and head back to higher currency levels? One would think so, but we would have to get through today's rate meetings of the BOE and ECB first. Then see a not-so-shiny Jobs Jamboree picture tomorrow for that to happen.

It's not all wine and roses for the U.S. economy, which is what is really giving me a rash watching this dollar strength. For instance, sales at U.S. retailers fell the most since March last week, and online purchases did NOT pick up the slack. U.S. retail sales fell 4.4% last week… Does that look like the stuff that strong employment is made of? I don't think so… But I carry on.

Before I go to the Big Finish, I'll leave you with this upbeat (NOT!) note… Moody's Investors Service issued a report yesterday that said, "Defaults by speculative-grade companies will quadruple next year as the era of 'easy credit' come to an end and economic growth slows." Quadruple? That sounds ugly… Very ugly!

Currencies today: A$ .8720, kiwi .7725, C$ .9840, euro 1.4570, sterling 2.03, Swiss .8840, ISK 61.60, rand 6.7780, krone 5.5150, SEK 6.4475, forint 173, zloty 2.4550, koruna 17.93, yen 110.80, baht 30.37, sing 1.4460, HKD 7.7950, INR 39.50, China 7.4090, pesos 10.8560, BRL 1.7920, dollar index 76.61, Oil $86.25, Silver $14.33, and Gold… $794.60

That's it for today… That's sad what happened in Omaha yesterday… Our thoughts should be with those families… Winter has officially set in here, as I look at my outside temperature gauge and it says it's 23 degrees outside… Burrrrrrrr… And with my thin blood these days, that cold just goes right through me, like a hot knife through butter! I left my shoes out, and I guess I got up too early (wink, wink) for St. Nick, because they were empty! I hope your shoes were full of goodies, and not a lump of coal like I feel the U.S. economy's shoes will get! Have a great St. Nick's Day!

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Chuck is the author of The Daily Pfennig, which is reposted here at The Daily Reckoning. His respected analysis is frequently quoted in or referenced by: the Wall Street Journal, U.S. News and World Report, CBS Market Watch, USA Today, CNNfn, the Chicago Tribune and many other publications.

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