We can't name the event that will end the US Dollar rally, but at a guess, we haven’t seen it yet.

Foreign Exchange Outlook: At last the Treasury and Fed have launched an initiative that the market likes and is responding to. At last the government is doing something about housing directly and not indirectly through credit default swaps or capital injections to banks. At last the government is listening to the market, since the structure of the TALF was something proposed by player (according to Market News). This is tremendously good news. Unable to force banks to lend—the one big missing ingredient in the Citi bailout and the earlier capital injections-the government has found a way to "incentivize" the banks. And it took only three months, if we count from end-August. For a country as big as the US with so many conflicting lumps of self-interest, this is actually not too bad.

Ironically and perversely, though, a workable initiative is dollar exchange rate negative, since it means global risk is down and opportunity is up. It’s nice to have greed plus fear back again and not just fear and fear, but some issues do remain-not the least of which is “Is it enough?”

We may get a hint today in the form of personal income and spending, with spending expected down a big 1% after -0.3% in Sept, according to the Bloomberg survey. Who ever heard of the US consumer reducing spending? We say the UK is about 9 months in front of the US on this and many other fronts. Household spending fell to a multi-year low in the UK and we probably have to expect it here, too. We also get data on durable goods order, new home sales and consumer confidence.

The other big factor is prospective interest rate cuts in the UK, Europe and US in December. Remember that rate cut were a currency favorable event in Australia (with the Australian Dollar exchange rate ralling) and the UK a few weeks ago, since they showed "responsiveness." If the ECB is seen as recalcitrant or dragging its heels, the euro exchange rate could get punished for that lack of responsiveness more than rewarded for having a favorable yield differential. (Foreign Exchange Traders dont need a reason to Sell Euros at the moment)

This is a topsy-turvy world.

Similarly, Foreign Exchange Traders will buy pounds if the Bank of England is aggressive, as seems likely. We are holding to our story that all the bad news is not out yet and any fresh instance of systemic failure will fall to the US dollars favor. This includes a retreat in equities, renewed weakness in commodities (especially oil), a big bank failure somewhere (anywhere), and so on. This doesn't even include all the terrible things that can happen in the political or natural world-riots, assassinations, earthquakes, and the like. It seems improbable that a giant rate cut in China will restore everything to conditions before. In fact, we think it really is a new era.

Downsizing is serious business.

We can't name the event that will end the US Dollar rally, but at a guess, we haven’t seen it yet.

Bye For Now

Barbara Rockefeller
Foreign Exchange Trading
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