We are not going to rush into dumping US Dollars just yet

Foreign Currency Exchange Outlook

Today we get durables goods and new home sales, both probably on the bad/low side, but let’s save time and be realistic—the fate of the US Dollar today depends on calm returning to the financial sector (equities rising, bond prices falling) and on the price of oil. For what it’s worth, new homes sales are expected to drop to a rate of 504,000 in June after dipping to 512,000 in May, and durables are forecast to fall 0.5% in June after being steady in May.

As we noted yesterday, the housing sector hasn’t bottomed yet and on that basis, it was premature for the US dollar to be rising. The Foreign Exchange market trades on expectations and quickly puts bad news behind it—perhaps too quickly. We had three Fed officials talking the hawkish talk, but that doesn’t mean the Fed itself feels it has the latitude to walk the hawkish walk. Revived hopes of a rate hike this fall were not realistic. Every single thing would have to line up to get that outcome, and how often does that happen?

Even if yesterday’s US Dollar selling was an overreaction to events in other markets, we can’t call an end to it. Dollar selling gets to be a habit. We would guess that the day ends badly for the dollar but the week will see a net gain. This is going to cause fingernail-chewing Sunday night. Which to choose—the potentially recovering US Dollar or the same-old, same-old bet the ranch against it? We are somewhat inclined to like the idea of a more enduring dollar rally. After all, we will be getting a very big new housing market rescue bill any day now, plus oil could stabilize near lower levels around $120-125, which is very dollar-friendly. The market just swallowed a ton of US government paper without demanding higher yields. And perhaps the worst of the housing crisis really is behind us, not to mention the financial market disclosure.

It’s possible the NAB write-down is not the canary in the coal mine, but rather the last hurrah.

We are not going to rush into dumping US Dollars just yet.

Bye for now!

Barbara Rockefeller