Farrell: Are The Fortunes About to Change for the Dollar?

I read in Thursday's Wall Street Journalthat "much of what's weighing on the dollar is the expectation among investors that Central Banks outside the United States will raise interest rates before the Federal Reserve does. Higher interest rates will attract money to these countries, lifting their currencies." The article went on to say "The other wild card is that the US economy could grow faster than economists expect. Part of the reason for the euro's rise against the dollar is the sense among some that the European economy will recover before the US."

I don't know about that.

While rates might go up or down for more than one reason, I don't see Europe growing faster than the US. Estimates for Q3 GDP for the United States are clustered around 3% and some are moving higher after the recent retail sales report. The best estimate I have seen for Europe is less than half that. Currencies reflect interest rates but also the industrial and financial strength of the underlying economy. I think relative growth expectations are/will shift to favor the US. I have also read a few economic reports recently that say on a "purchasing power parity" basis the dollar is 18% undervalued against the euro and 20% undervalued against the yen (Capital Economics.) I have not been able to get bearish on the dollar as you need to be bullish on some other currency, and I like the US economy better than the others I see.

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  • If the dollar were going into true cardiac arrest, I don't think the unending stream of Treasury bond offerings would be finding homes. On Thursday they announced a near record slate for next week of $43 billion two year notes to be offered Tuesday, $40 billion of five year on Wednesday, and $29 billion of thirty year bonds on Thursday. The market didn't blink which indicates that inflation is not a worry and that while the dollar has been weak, maybe its fortunes are about to change.

    Housing starts were released on Thursday and looked healthy enough at just under 600,000 but the bulk of improvement came in the volatile multi-family segment. Single family starts were off 3%. If the $8,000 first time homebuyers credit expires in November, look for this number to worsen appreciably. Unemployment claims finally slipped below 550,000 but just barely, but the Philadelphia Fed Index came in with a surprisingly strong reading of 14.1 when the consensus was for a level of 8. Not all of that was good news since reading the tea leaves revealed that a lot of shipments came out of inventory and not from new production. But I still ratifies the stronger Empire Index earlier this week and the Industrial Production reading as well.