US dollar to hang on to gains

Foreign Currency Exchange Outlook; Not to rain on everybody’s parade, but the stars have to line up exactly right this week for the US dollar to hang on to gains. First, oil has to stay low and appear to be going lower, whether we consider it a correction or a true change in sentiment. This means that any hurricanes nearing the Gulf have to veer away. Don’t you hate it when financial outcomes depend on the weather?

Second, regional banks have to be seen as not on the brink of failure. If we get another bank failure like IndyMac, it has to be some small outfit that nobody much cares about—it can’t be one of the big “regionals” like Wachovia.

Third, the economic agenda has to continue to bring no nasty surprises. This morning (10 am) we get the Conference Board leading indicators, probably a drop by 0.1pc in June, according to the Bloomberg survey. The forecast range is –0.4% to +0.3%. Bloomberg points out that 7 of 10 indicators are already known, stock prices, jobless claims, building permits, consumer expectations, the yield curve, supplier delivery times and factory hours. The Conference Board estimates the remaining three: new orders for consumer groups, bookings for capital equipment and the money supply. This means the number is probably already priced in and may not have much influence on any market.

Tomorrow it’s the OFHEO May house price index and on Thursday, June existing homes sales. Friday has June new home sales. We know they are going to be bad, don’t we? Friday brings June durables, which might be good because we know autos were up. Also Friday is the usual University of Michigan July consumer sentiment index (final).

Stock market guru Sandi Lynne says the biggie will be Wednesday’s Beige Book, which will be the last ahead of the August 5 FOMC. “If the word ‘deterioration’ crops up frequently in the Beige, it’ll compete with price pressures, in all likelihood.” But still, we get speeches from Philadelphia Fed Pres Plosser, already known to be a hawk, following Minneapolis Pres Stern last week, also a hawk. Nobody expects the Fed to hike on Aug 5 but a little dissent would go a long way to suppress outrage that the Fed has abandoned price stability to help the Wall Street oligarchy instead.

It’s a rotten thing to say, but the US dollar’s firmness this week relies to a certain extent on news from elsewhere being worse than in the US.

This is especially evident in the UK and sterling, whereas we get the opposite effect in Germany and thus probably the euro. The implication is that when Foreign Exchange Traders are uncertain about the US Dollar outright, they head for the crosses. Let’s say sterling does take off to the downside—it may do worse against the euro and yen than the dollar, but if the euro and yen rise against the pound, they may also rise against the dollar.

We deduce that this is going to be a bad week, choppy in a narrow range and lack of clarity on exactly where sentiment lies.

Bye for Now

Barbara Rockefeller