Euro Getting Tired

Euro bulls received their wish yesterday as the TICS data printed beyond even the worst market expectations at $48.1 Billion versus last month's $63 Billion surplus. However, looking deeper into the data the situation may not be as dire as it appears. Foreign demand for US assets actually remained relatively stable at $60 Billion. What skewed the data downward, was the renewed appetite from Americans for foreign securities with that number swinging from net sales of $3 Billion in September to net purchases of $15 Billion in October. In fact, this was the largest net buying of foreign assets by US investors since the height of the bull market in mid-2000 indicating that some US portfolio managers may be chasing the currency rally through capital markets.

Despite the clearly bad eco data euro could not take out the all time highs. Yesterday we stated that the pair is likely to trade in 1.31-1.35 box for rest of the year and that "even if (TICS) is dollar bearish it will most likely only be able to push the EUR/USD to the upper end of that range". Tonight's much wider than expected French Current Account deficit and SNB' s reluctance to raise rates an additional 25bp because of the strong franc undermines support for continental currencies to rally further. The EUR/USD may catch yet another bid this morning should the US Current Account deficit report a gap wider than the market expectation of -$170 Billion, however, with Trade and TICS data already out, much of the surprise from the release has already been discounted.

Meanwhile, in London, the pound continues to enjoy the benefits of rebounding UK economy as Retail Sales print much stronger than expected 0.6% versus 0.2% projected. The surprising gain is partly to due to sharp discounts by retailers as well as continued strong wage growth amongst UK consumers. Must be nice to be British.

Back in October I posted:

The euro is the John Kerry of currency. It's only value is in opposition to the dollar.

(Well, I also made an anology about Anna Kournikova and the euro... something about an absence of the proper male reaction... Maybe that's why that thread was pulled.)

If the dollar and the U.S. economy were as weak as is said up and down the planet, gold should be in the 800s and the euro should be pushing the British pound out of its way like a runaway train. The euro can hardly get to the next stop, much less take over from the dollar. There is no alternative to the U.S. dollar.

So who thought the President was blowing it out the backside with yesterday's "strong dollar" announcement? Lol! He wouldn't have said a thing if he didn't already know what was going to happen next. Although he would have been right, he wouldn't have looked good had he said it a month ago. Timing is everything.

The Administration has played this one out beautifully. They wanted a weak dollar, but not too weak. Now, they're pulling it back up -- but not too much.

What do you (or anyone) think about this:

The money supply should be enlarged as much as possible without causing undo inflation. How the dollar pegs against other currencies is of little interest because the total amount of dollars available will be greater, even if an individual dollar is worth less.

So if the dollar continues to fall, it matters little as long as inflation remains stable.

Are the above statements correct?

Seriously, what are you or that guy who wrote that article talking about? Have you looked at a chart recently? The euro gained ten us-cent in a little more than a month. It hit record highs every day for a whole week, no profit taking, no other setbacks, no nothing. Of course it can't go on like that forever, eventually people start realizing their profits.

But that doesn't change the fundamental data, that still clearly indicates a further deterioration of the dollar, not only against the euro, but also against every other currency around. The USA needs to attract $1.8 billion a day in foreign investments. That is just to keep the rates steady, not to talk about a return to the old strength of the Dollar. This takes up 3/4 of all the savings of all the people on this planet every year, how long do you expect this to work?

This never was much of a euro strength, but a dollar weakness. The Euro just happens to be the only real alternative to the dollar, thats why there's so much babbling about it and why it rose a little more than most other currencies.

And don't even attempt to bring Bush into this. Besides talking and maybe putting some pressure on China to revalue the Yuan there really isn't much he can do about the exchange rates. (And he did say it a month ago, a year ago, all the time since the dollar started falling, it just doesn't change anything.)

Only the big central banks could stop the fall of the dollar for a while by a joined intervention in the currency market, but even that would only slow things down, not reverse the trend. The dollar needs to continue to fall until the current account deficit is either closed or at least is down to a sustainable level.

The USA needs to attract $1.8 billion a day in foreign investments.

Then ask yourself, as the author of the piece does, why US investors are buying overseas when it is more expensive for them to do it with the lower dollar? The author says it's investment money "chasing the currency rally through capital markets." I don't buy that explanation, other than as it means that investors always seek value. But in this case, they're chasing value despite the obstacles of the dollar exchange. Once again, things aren't nearly so bad as folks would have it.

Where you see an absence of euro strength in the face of "dollar weakness," I don't see dollar weakness at all. The dollar is calling the shots here, not the euro, or any other currency. Just becuase the dollar is down doesn't mean it is weak. It is finding its place according to its inherent numbers. The way the press and the doomsayers are screaming the dollar ought to be on its ass. It's not. You say it's got further to fall. I doubt it, and from the pronouncements of yesterday, I'm damned sure the President thinks it ain't falling anymore, either.

You didn't understand what the President did. He wasn't trying to influence the markets -- he can't, and he knows it. He's speaking about it now since he thinks it will strengthen. That way it will look like he influenced it, whereas you and I know both he can only talk on this one.

Btw, all those late 1990s foriegn money inflows? Guess where all that cash went? Uh, let's see, let's start with pets.com... The money came in, and it never went back home.

The U.S. doesn't "need" to attract foreign investments. The exchange rates cover what the money flows mean. It's not some big scheme to excuse the account deficit. That the euro can't kick in the dollar's door means that euro markets are not attracting any more money than what the dollar gives 'em the daily shrug of the currency markets.

Where do you think the exchange rates come from? If the US doesn't attract enough investments the Dollar needs to fall further, it's the most basic market mechanisms of supply and demand. For the Euro to strengthen against the Dollar it doesn't need to attract a lot of foreign investments, because other than the US the euro zone has a more or less balanced current account.

US investors buy outside the US because they expect the Dollar to fall further. If the dollar keeps falling they make more profit.

If you don't see the exchange rates as an indicator for the strength / weakness of a currency, then what else do you use? It looses purchasing power on the world market, what other signs do you need?

As I already said: Bush has been repeating that same statement for month now. You make it look that he talked about his 'policy of a strong dollar' for the first time, he has not.

OK, so the foreign investments from the late 90s are gone now, for nothing. The rest of the world looses faith in the dollar. And if someone invests in the US he is never going to see that money again. why exactly do you expect the dollar to become stronger again?

Sorry for slow reply -- and gonna have to make it quick, as the weekend starts in, oops, five minutes ago!

My bet is that the dollar has gone down as far as its gonna go -- that is, staying within this current range. I say this because I see U.S. economic weaknesses having played out in the exchange as far as they'll go. If investors are now chasing the currency markets through overseas securities then they're a year late on the game, which is evidence enough that it's had its run.

Anyway, your points are well taken and deserve more attention than I can give just now. Have a great weekend!

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