US Dollar

yesterday came up the question of whether Forex consumers can really be happy with low non-farm payrolls, rising gasoline prices and escalating tensions in the Middle East. Today we face the answer: YES. Even in the midst of increasing risks, consumers are happy. The jump in confidence is even more surprising after retail sales dropped in June. However the mere fact that companies are not firing, which we see evidence of through the low jobless claims reports, and the fact that the homes are still being sold is enough to keep consumers happy.

After an upward revision to existing home sales in the month of May, sales in the month of June fell by a less than expected 1.3%. It seems that every time analysts issue their warnings about how the next series of economic reports will show the clear deterioration in the US economy, data surprises to the upside. For the time being, this morning’s Forex reports should have a positive impact on the US dollar. The stability of the economy and the housing market in the official data supports the case for a possible interest rate hike by the Federal Reserve next month.

The unofficial data however continues to warn of the dangers that lie ahead especially since existing home sales is a lagging indicator that tends to reflect sales that have been agreed upon in April and May. Regional indexes are far less optimistic on the outlook for the housing market and we may glean more insight from tomorrow’s Beige Book report. Yesterday we had info about the $1.5 trillion of adjustable rate mortgages that are scheduled to reset to market rates over the next 17 months. Of course, these alarm bells have been ringing for some time and to date there have been limited evidence that a sharp housing driven contraction is underway.

Yet it is difficult to find arguments to support a further dollar rally aside from high yield. Just this morning, China’s National Bureau of Statistics said that they should speed up the pace of diversification of (their) country’s Forex reserves to help resolve the risk of possible losses to the dollar assets in the reserves. As the world’s second largest holder of US dollar reserves, China is estimated to own $650 to $750 billion US dollars. Their message of dumping US dollars is clear and poses a big risk to further dollar strength. However we are used to being surprised by the greenback’s resilience, especially under the leadership of mixed message Ben (Bernanke). Therefore it would not be shocking to see a prolonged tightening campaign keep the dollar propped for a few more weeks.