A jump up in oil prices will see Traders Sell Dollars

Foreign Exchange Currency Outlook : We get some evidence of the mood of the consumer today with retail sales. Bloomberg reports that non-auto purchases probably fell 0.2% after a 0.4% gain the month before. We get the announcement at 8:30 this morning ET, with the forecast range a shockingly wide -0.6% to +0.6% in the Bloomberg survey.

We also get PPI for Aug, with the core PPI expected up only 0.2% after 0.7% in Aug. Then it’s the Reuters/University of Michigan consumer sentiment index, probably a bump up as gas prices fell, to 64 from 63 and the 18-year low of 56.4 in June.

We say the biggest threat to the Foreign Exchange Outlook is not Lehman, which will get resolved soon to little overall effect (if higher moral hazard), or the readings of the consumer’s mood these days, but rather than darn hurricane. So far the US Dollar is escaping a big effect from oil, which is remarkably tame under the circumstances, but that could change very fast if the damage to producing and refining is big. Oil has been the driver and seems likely to remain so. A jump up in oil prices to (say) $110 and more would be a watershed event for the dollar. We don’t expect it, but it’s a risk. The hurricane is 500 miles wide, Anything can happen. We hate it when market outcomes depend on the weather (which is why we never diversified into the ag commodities).

Overall, we remain a raging US dollar bull, with 1.3250 or 1.3000 in sight, but to repeat, anything can happen.

Bye For Now

Barbara Rockefeller

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