Thursday, July 24, 2008

US Dollar Intervention

The Dollar made some gains along with equities yesterday, while commodities and metals fell.

So, can one now assume the dollar crisis is over? NOT a Chance!

Then why the uptick and how long should we expect it to last?

The strengthening dollar can likely be attributed to coordinated global dollar intervention by the central banks of the world -- to prevent a full-blown dollar rout and stave off rapidly spiraling inflationary pressures. Bernanke even stated such in his congressional testimony last week: "Dollar intervention may be justified in Disorderly Times."

In a nutshell: By supporting/manipulating the dollar, short traders are forced to cover, thus causing the dollar to rally and energy prices to fall. When used in conjunction with other instruments in the PPT arsenal (i.e. large gold and energy shorts) the effect can be pronounced.

Timesonline: Ben Bernanke highlights fight against inflation

The dollar rebounded from Tuesday's record lows as Mr Bernanke combined his own emphasis on the Fed's determination to rein-in inflation by again brandishing the threat that Washington could intervene to halt the slide in the US currency.

In a new signal of growing concern at the Fed that the dollar's rapid decline on foreign exchanges is stoking inflationary pressures by driving up America's import bills, Mr Bernanke fired a fresh warning at the markets, making clear that currency intervention remains a weapon at the disposal of the US central bank and Treasury.

“Market intervention is a policy that's been undertaken a few times. I think it's something that should be done only rarely, but there may be conditions in which markets are disorderly where some temporary action is justified,” he said.

Forbes: Time is now for intervention to prop dollar:

Intervention by the U.S. Federal Reserve, undertaken in concert with the European Central Bank and other global economic powers, could be an inflexion point for the dollar after its 6 year fall.

And with the falling dollar playing a substantial role in rising oil prices, official action to back the currency could provide relief for consumers and ease the pressure from inflation, both in the United States and globally.

It would also be a very useful and timely insurance policy against any run on the dollar should global holders of U.S. debt take fright at what may be a massive bill, and proportionally huge supply of new U.S. debt, to backstop Fannie and Freddie and sort out problems in U.S. real estate and banking.

"This is a situation crying out for intervention and leadership," said Nick Parsons, head of market strategy at nabCapital in London.

The Bush administration has long argued that the value of the dollar should be set in the free and unfettered market, though where exactly a free market can be found I am increasingly unclear.
The serial bailouts, first of Bear Stearns and now Fannie Mae and Freddie Mac, have robbed that argument of much of its moral and intellectual authority, though probably not all of its emotional appeal.

So, with that understood, how long should we expect the rally to last?

My bet is: we may see 74-75 as a rebound high for the US Dollar index, but the rally will probably end not later than August 5th... On that day, people will finally realize that Bernanke's hands are tied and can not/will not raise interest rates AT ANY TIME this year. Shortly thereafter, dollar selling will once again commence in earnest -- ultimately overtaking the efforts of our global central bank interventionists.

Bottom line: I still feel 70 will be taken out later this year.

US Dollar Index Daily Chart

US Dollar Index Weekly Chart


The DOW has rebounded nicely over the last week or so, but I now think it's time for another leg down. With Jobless Claims, Existing Home Sales, New Home Sales, Mich Sentiment and Durable Goods releases due later this week, I think it's likely we'll see a Friday closing number lower than today's 11,632.




Anonymous said...

Very timely considering todays Congressional hearing.

Washington , DC - Last month Congressman Ron Paul, ranking member of the Subcommittee on Domestic and International Monetary Policy called for a hearing on the relationship between the falling value of the dollar and the recent rise of oil prices, noting:

“The price of oil is currently among the most pressing issues to American workers. Congress should be examining all factors contributing to the high cost of oil, and monetary policy is one of the key factors in the run-up in price.”

That hearing request has been granted and scheduled for July 24 at 2:00pm.

Besides himself, 16 other Representatives signed on to the letter, including ranking member of the House Committee on Financial Services Spencer Bachus, and Chairman of the Republican Study Committee Rep. Jeb Hensarling.

Confirmed witnesses will be:

Economist Walter J. Williams, of which examines government economic reporting.
Economist Robert Murphy of the Institute for Energy Research
Economist C. Fred Bergsten, Director of the Peterson Institute
Dr. Joseph Kasputys of Global Insight, Inc.

Randy said...


Thanks for the tidbit, I was unaware. Please share any new info you come across regarding the outcome.