price of oil would fall like a rock.

Foreign Currency Exchange Outlook: As noted yesterday, it takes a steady stream of decent US data to keep the US Dollar defended, but really bad news from elsewhere can help, too. On Thursday we get the IFO report on business sentiment from Germany, always an influential number, plus the flash estimate of manufacturing PMI. We get Euro Zone industrial orders and eurozone PMI, too, and in the UK, consumer confidence, retail sales, and BoE minutes.

We might call it “dueling data”—who has the gloomier outlook? We say it doesn’t matter. As we saw with horrendously bad news from the UK yesterday (the government predicting “years” of slowdown), Currencies don’t always respond the way they “should.” Pounds Sterling didn’t fall on the news, and even ended the US day back over its own round number, 2.0000.

If the IFO index comes in down to 100.1 from 101.3 in June, as the Bloomberg survey suggests, so what? The euro may take a dip but nobody really thinks the ECB makes monetary policy on the IFO index. The ECB claims to have no bias but everyone thinks it secretly has a bias to tightening, even if the forecast has been shifted out from the fall to January. In the absence of a parallel tightening intention in the UK and US (or Japan), how can the euro not proceed higher against all three currencies? Yesterday Euros vs Japanense Yen made a new lifetime high of 169.92, close to the round number 170. The crosses often get the action when Foreign Exchange Traders are a bit confused about the US Dollar outright, but this never lasts for long. Last Tuesday we had a new lifetime high of 160.40 in Euros to US Dollar. We have almost no hope of that level failing to get reached again, if not this week, then sometime this summer.

We continue to think that if by some miracle oil were to slip down to $1.20 and stay there, the dollar has a fighting chance. What can make oil fall? Well, falling prices engender more decline as “investors” perceive excessive risk. Many of these investor really are investors and not speculators, meaning they are accustomed to less volatile outcomes (and less leverage). What changes the outlook for the supply demand picture?

One thing might be a true drop in perceived future demand from the US if the US were to embrace alternative energy in a big way. T. Boone Pickens is heavily advertising his wind power ideas. While a majority of polled Americans favor offshore drilling, a majority also favors environmental protection and alternative energy—the survey results depend entirely on how you ask the question.

Let’s say we get some political leadership on this. It certainly won’t come from the oil company-addled Republicans, so it would have to be Obama. We don’t know if he would do it, but let’s say he does create a new department on alternative energy and puts somebody really good in the top job, like Schwarzenegger (who volunteered). Boy, the price of oil would fall like a rock. This is the sense in which Obama is seen as potentially very favorable for the US Dollar, contrary to the big government/excessive spending picture that the opposition generally paints of the Democratic party. Everyone likes the fiscal rectitude posture of the Republicans, their business-friendly stance and their supposed foreign policy toughness, but remember, oil is everything. If Obama embraces alternative energy and that causes the price of oil to fall, it’s a win-win. Trouble is, we don’t actually know much about what Obama stands for.

Wishful thinking? Alas, yes. But it’s been a long time since Americans had wishes.

As the election cycle proceeds in the US, we will find that it plays an ever larger role in currency markets. Meanwhile, we have to watch the stock market, which leads sentiment and to a certain extent, the economy. If we are going to get a small bank failure, we could be starting to find out about it this week. Today Paulson speaks, presumably in support of his plan for rescuing Fannie and Freddie, but that’s already old news. It’s possible that last night’s US Dollar rout really will fizzle, as seems likely this morning. But stay tuned.

Soon the little stuff will morph into Big Picture stuff.

Bye For Now

Barbara Rockefeller