Dollar Goes Ballistic on Europe's Woes

Euro plunging!

Three Scenarios of the Relationship Between the Dollar and the Stock Market

by Charles Hugh Smith from the Of Two Minds blog:


The Stock Market and the Dollar: There Are Only Three Possibilities
With stocks and the dollar on a see-saw, there are only three possibilities to choose from.
Since the stock market is in the news (perhaps as a result of trillions of dollars/euros/yen/yuan/quatloos having suddenly vanished from millions of accounts), it seems timely to examine the key correlation between stocks and the U.S. dollar. As I have often noted here, this "big picture" correlation is a simple see-saw: when the dollar is scraping bottom, stocks are at their highs, and when the dollar is up then stocks are tanking.
At the risk of alienating chart-averse readers, I've marked up the charts of the S&P 500 (SPX) and the U.S. dollar index (DXY).
For those who aren't going to look at the charts, what they suggest is that there are really only three possibilities in play:
A. Stocks go up and the dollar drops to new lows
B. Stocks fall and the dollar rises significantly, a pattern that has repeated several times since 2007
C. The see-saw breaks and stocks and the USD rise or fall together.
The key to the relationship between stock valuations and the dollar is corporate profits. When the dollar declines, then U.S. global corporations' overseas earnings--now roughly 60% of total profits for many big global corporations--expand as if by magic when stated in dollars.
When the euro and the dollar were equal back in the early 2000s, then 100 euros of profit was $100 when stated in dollars. When the euro rose to $1.60, then the same 100 euros of profit earned by the U.S. corporation in Europe became a stupendous $160 in profit when stated in dollars.
This explains why the Fed has been so keen to trash the dollar: it magically increases corporate profits and thus drives stocks higher. The mainstream financial media's explanation for the weak-dollar policy is that the Fed is anxious to increase exports, but this is a sideshow; exports make up less than 9% of the U.S. GDP. The real action is in corporate profits, which thanks to the weak dollar are near all-time highs of almost 14% of the entire GDP.
So those picking #3, the see-saw breaks and the dollar and stocks rise or fall in parallel, have to explain why this dynamic has broken down, and describe the new dynamic which has caused the USD and SPX to rise or fall as one.
Those picking #1, that stocks are about to rebound and the dollar will plunge to new lows, have to explain what force will drive stocks higher and weaken the dollar. The easy answer is the Fed will launch a "monetary easing" a.k.a. QE3 to goose risk assets, including stocks.
Perhaps this will do the trick, but just on a purely technical basis, the stock market has a number of arrows in its back, and nobody knows just yet if any of them are poisoned:


There are a lot of arrows in the back of the market. One of the biggest is declining volume; if volume is the weapon of the Bull, then declining volume has a distinctly bearish implication. One of the basic tenets of technical analysis is support/resistance: key levels (often round numbers like 1,200 or 12,000) become important when stocks bounce off them (support) or are unable to punch through them (resistance). When stocks break support, then that line becomes resistance when stocks try to rise. If stocks break through resistance, then that line become support should markets decline.
When key support levels are decisively broken, huge damage is done to the market, even if the actual point drop appears modest. The SPX broke a key support level just above the pyschological line at 1,200. This has provided strong support/resistance going back to 2008, so it's meaningful.
In the typical course of things, the SPX will attempt to break above that resistance on a rebound off the strong support offered by the 200-week moving average, a level it almost kissed last week.
But there are a lot of other arrows which suggest that will be difficult. Chartists like to draw trendlines, and if we trace out all the trendlines from the 2009 bottom, we get a fan of broken trendlines. This suggests a weakening major trend.
Then there's those three indicators arrows firmly planted in the market's back; RSI (relative strength), MACD (moving average convergence-divergence) and stochastics are all diverging from the rally--all have been declining as the SPX traced out a classic three-peak "head and shoulders" topping pattern over the past few months.
If we look at RSI, we see it is not yet oversold. We also see that when things get ugly, as they did in late 2008, the RSI can actually climb out of being oversold even while the market is in a freefall. When markets are falling, RSI can remain low for months.
MACD offers a very simple window into stock trends: MACD above the neutral line, Bullish, MACD below the neutral line, Bearish. MACD is heading straight for the neutral line and if it crashes through it, it is a distinctly negative indicator.
Stochastics can stumble along an oversold bottom for months, too, so there is little evidence here of an impending rally.
There is strong support around the 1,050 mark, but the market sliced through this like a hot knife through butter back in 2008 before finding some solid ground around 900. When that failed, 666 marked the final trough.
Maybe the SPX recovers the 1,220 level, maybe not. Nobody knows how many of the arrows in its back are poisoned. We'll just have to watch support/resistance.
Those picking #2, a rise in the dollar and a corresponding drop in stocks, have to explain how the dollar can survive the poisoned chalice proffered by the Federal Reserve. The Fed's entire game plan boils down to driving the dollar down by whatever means are necessary. Many observers see the Fed as all-powerful, irresistable, with god-like powers to move markets.
But as I have noted here many times, the Fed's mighty armament is revealed as a BB gun when compared to the foreign exchange markets ($2-3 trillion traded daily), the global risk trade ($30-$100 trillion, depending on what markets you include), and global debt denominated in dollars (in the trillions).
Thus the Fed's power is not the infamous printing press, but the belief of market players that the Fed can single-handedly reverse markets. On a large enough scale, the Fed does have some leverage; for example, the Fed played some $18 trillion into global markets to save the day in 2008.
It is my contention that the Fed's political capital and credibility--the "magic" of omnipotence--have both sunk below critical thresholds (Don't Fight Bet On The Fed August 5, 2011) and that the law of diminishing returns has emasculated the market-moving value of QE3, 4, 5, etc.: each infusion to goose the risk trade does less than the previous prop job.
The timeline of manipulation has also compressed: the Fed's "save" in 2007 lasted a year, the order-of-magnitude greater "save" in 2008-9 bought perhaps a year and a half, and QE2 boosted risk assets for less than a year. If QE3 is smaller than QE2, then its effects will be entirely transitory--weeks, perhaps only days or even hours.
Dollar Bears are assuming the USD will crash through support to new lows. That is certainly one possibility--but it can only happen if stocks rise (choice #1) or the see-saw breaks (#3).



The indicators are exhibiting positive divergence, i.e. slowly rising even as price declines or noodles around a narrow trading range. The USD has traced a classic pennant or flag "wedge" of lower highs and higher lows. This compression of price action often leads to a big move up or down. Those betting on the Fed's omnipotence to crush the dollar to new lows have to overlook the positive divergence and the previous pattern of the dollar rising dramatically when the risk trade unravels. Those betting the dollar will repeat that pattern have an easier case to make technically.
From a fundamental view, the DXY index is on a see-saw with the Euro, as the DXY is composed of a basket of six currencies dominated by the Euro (Euro 57.6%, Yen 13.6%, Sterling 11.9%, Canadian Dollar 9.1%, Swedish Krona 4.2%, and Swiss Franc 3.6%).
Thus those betting on the DXY hitting new lows are implicitly betting on a recovery of the Euro. THose betting on major dollar bounce are betting that the Euro is in deeper trouble than the U.S. dollar.
There is no crystal ball that foretells the future; when it comes to forecasting the future, we have only charts, judgment, intuition and probabilities.

Dollar Massacre

Commodity prices have been rising steadily across the board for a month now. Why? Because the Dollar carry trade in back in force, and the currency is getting massacred.

Today's intraday chart:

Dollar Surges

Dollar Regains Some Footing!

More Dollar Dumping

from Bloomberg:
The dollar dropped to its lowest level against the euro this year on speculation record U.S. borrowing will undermine the greenback, prompting nations to consider alternatives to the world’s main reserve currency.

The 16-nation euro gained for a fourth day versus the dollar as the Russian government said emerging-market leaders may discuss the idea of a supranational currency. The pound strengthened to $1.65 for the first time since October.

“There’s been a lot of talk out of Russia about a new global currency, and that’s contributing toward this latest bout of dollar weakness,” said Henrik Gullberg, a currency strategist at Deutsche Bank AG in London. “These latest comments are just adding to the general dollar weakness we’ve seen recently.”

The Dollar Index, which ICE uses to track the currency’s performance against the euro, yen, pound, Canadian dollar, Swedish krona and Swiss franc, fell 0.5 percent to 78.77.

Russian Proposal

Russian President Dmitry Medvedev may discuss his proposal to create a new world currency when he meets counterparts from Brazil, India and China this month, Natalya Timakova, a spokeswoman for the president, told reporters by phone today. Medvedev first proposed seeking alternatives to the U.S. dollar as a reserve currency in March.

The dollar also declined on speculation “smaller” central banks started today’s selling of the greenback, said Sebastien Galy, a currency strategist at BNP Paribas SA in New York.

Morgan Stanley Say Dollar to Depreciate

from Arlan Suderman tweet:

Morgan Stanley models put probability of a large US$ depreciation over next year the highest in decades. No full-scale crisis tho.

Dollar Down, Commodities Up

Relationship Between Dollar and Commodities

This chart shows the direct inverse relationship between the Dollar and the price of commodities. The Dollar is the green one, and the Rogers Commodity Index is shown in blue. The relationship is strikingly correlative!

Devaluation of the Dollar

Compare the charts of the Dollar with the other currencies below. Why is the United States government devaluing its currency and intentionally stoking the fires of inflation?

US DollarEuroBritish PoundAustralian DollarCanadian Dollar

Groaning Greenback = Climbing Commodities = Inflation

There is a nearly perfect inverse relationship between the devaluation of the Dollar and the climbing prices of commodities, as shown here with the price of crude oil, gold, and the declining value of the Dollar! This is no coincidence! It is correlation!

Crude OilGoldDollar

Now the Euro Credit Rating Is In Jeopardy

from Bloomberg:
The euro fell for the first time in seven days against the dollar after Moody’s Investors Service downgraded its rating outlook for two Bulgarian banks, reviving concern over the health of the European financial system.

The 16-nation currency also dropped versus the yen after the Telegraph newspaper reported an official at Germany’s financial regulator saying the debt of the country’s banks will blow up “like a grenade” unless they participate in the government’s bad bank plan. South Korea’s won declined for a second day versus the dollar on concern North Korea will conduct more nuclear tests after the communist state said yesterday it successfully carried out an underground explosion.

“The credit-rating issue will continue to dominate the market and currencies or countries which are targets of speculation may come under pressure,” said Yuichiro Harada, senior vice president of the foreign-exchange division in Tokyo at Mizuho Corporate Bank Ltd., a unit of Japan’s second-largest banking group. “No country across the globe will be able to maintain a AAA rating.”

The euro declined to $1.3977 as of 1:43 p.m. in Tokyo, from $1.4017 yesterday in New York. It climbed as high as $1.4051 on May 22, the strongest since Jan. 2. The single currency weakened to 132.32 yen from 132.92 yen. The dollar traded at 94.68 yen from 94.83 yen.

The euro dropped for the first time in four days versus the yen after Moody’s said it placed the financial-strength ratings of Bulgaria’s DSK Bank AD and First Investment Bank Ltd. on review for possible downgrade. Moody’s cited “the likely deterioration of the Bulgarian operating environment,” as the reason for its decision. DSK Bank is rated D+ and First Investment is ranked at D.

German banks have 200 billion euros ($280 billion) of bad debts, Jochen Sanio, president of Germany’s regulator BaFin said last week, according to the Telegraph. Write-offs may reach 816 billion euros, twice the total reserves of the country’s financial institutions, the newspaper reported, citing an internal memo from the regulator’s office. Germany is “more than able” to cope with the 200 billion euros of toxic assets that its banks still hold, Sanio said in an interview with Bloomberg News last week.

“That report over the German debt situation isn’t helping sentiment toward the euro,” said Adam Carr, a senior economist in Sydney at ICAP Australia Ltd., a part of the world’s largest interbank broker.

Gains by the dollar may be tempered on speculation bond sales this week will renew concerns that a record supply of Treasuries will jeopardize the U.S.’s AAA credit rating.

Ten-year Treasuries fell the most since June 2008 last week as the U.S. prepared to resume debt sales after a two-week pause. The Treasury plans to sell $40 billion in two-year notes today, $35 billion in five-year notes May 27 and $26 billion in seven- year notes May 28. It will sell $61 billion in three-month and six-month bills in a weekly auction today.

The U.S. will increase debt sales to $3.25 trillion in the fiscal year ending Sept. 30, according to Goldman Sachs Group Inc., as President Barack Obama borrows record amounts to try to snap the deepest recession in at least 50 years. S&P lowered its outlook on the U.K.’s AAA credit rating May 21 to “negative” from “stable,” raising concern that the same may happen to the world’s biggest economy.

“Given growing concerns about U.S. creditworthiness, capital outflows from the dollar-denominated assets may gain further momentum,” said Kengo Suzuki, manager of the foreign bond trading department in Tokyo at Mizuho Securities Co., a unit of Japan’s second-largest banking group.

Is It Any Wonder That the Dollar Continues Its Plunge?

The Dollar has continued its plunge overnight and this morning. It looks like it's in freefall!

Daily chart also:
from AP on Breitbart:
The dollar kept falling Friday, notching fresh multimonth lows against the euro, pound and yen as a warning that Britain's debt level may result in its credit rating being cut ricocheted into worries about the massive U.S. deficit.

The 16-nation euro rose to $1.4015 in morning trading from $1.3889 in New York late Thursday—its first time above $1.40 since Jan. 2.

The British pound rose to $1.5916 from $1.5890, peaking at $1.5945 earlier in the session, its highest point since Nov. 6.

More Debt Worries Continue to Sink Dollar

from Bloomberg:

Treasury Secretary Timothy Geithner committed to cutting the budget deficit as concern about deteriorating U.S. creditworthiness deepened, and ascribed a sell-off in Treasuries to prospects for an economic recovery.

“It’s very important that this Congress and this president put in place policies that will bring those deficits down to a sustainable level over the medium term,” Geithner said in an interview with Bloomberg Television yesterday. He added that the target is reducing the gap to about 3 percent of gross domestic product, from a projected 12.9 percent this year.

The dollar extended declines today after Treasuries and American stocks slumped on concern the U.S. government’s debt rating may at some point be lowered. Bill Gross, the co-chief investment officer of Pacific Investment Management Co., said the U.S. “eventually” will lose its AAA grade.

Unfortunately, the Treasury Secretary has little credibility when the White House' actions contradict its teleprompter speech. Talk is cheap! Actions speak louder than words!

Dollar Continues Downward Path As Debt Worries Rise

from Reuters:
The dollar on Thursday plunged to its lowest level this year against major currencies, and the euro approached a five-month high above $1.39 as worries about swelling U.S. deficits soured investors on U.S. assets.

Standard & Poor's announcement that it could downgrade Britain's triple-A credit rating initially weighed on sterling. But Pacific Investment Management Co's Bill Gross said fear the United States may face the same predicament slammed the dollar and drove the 10-year Treasury yield near a two-week high.

"No one wants to admit it but there might be investors nervous enough with the extreme levels of indebtedness of the U.S. government so that just the thought of a downgrade would provide an excuse to sell dollars," said Matt Esteve, a trader at Tempus Consulting in Washington. "If such a thing happened, the impact would be huge."

The U.S. Treasury on Thursday said it would sell another $101 billion in notes next week. [ID:nN21559422]

The euro was up 1 percent at $1.3899 . Earlier, it hit $1.3923, its highest level since early January. The dollar was down 0.6 percent at 94.25 yen, near a two-month low beneath 94 yen . An index gauging the dollar's strength against a basket of six major currencies hit its lowest level this year. .DXY

S&P's warning on the UK initially lifted the dollar by some 3 cents against sterling, but the pound recovered and hit a 6-1/2-month high near $1.59 before easing back to $1.5861 , up 0.8 percent from late Wednesday.

Playing Dollar Dominoes

from financialpost.com:

The U.S. dollar's day of reckoning may be inching closer as its status as a safe-haven currency fades with every uptick in stocks and commodities and its potential risks - debt and inflation - are brought under a harsher spotlight.

Ashraf Laidi, chief market strategist at CMC Markets, said Wednesday a "serious case of dollar damage" was underway.

"We long warned about the day of reckoning for the dollar emerging at the next economic recovery," Mr. Laidi said in a note.

Mr. Laidi said economic recovery would weigh on the greenback as real demand for commodities, coupled with improved risk appetite, caused investors to seek higher yields in emerging markets and commodity currencies. This would draw investment away from the U.S. dollar, which was dragged down by growing debt and the risk quantitative easing would eventually spark a surge in inflation.

The U.S. dollar slid against most major currencies Wednesday, hitting a five-month low of US$1.3775 against the euro and pushing the Canadian dollar up US1.21¢ to a seven-month high of US87.69¢.

John Curran, the senior corporate dealer at Canadian Forex, said the U.S. dollar would likely fall further in the next week, with the Canadian dollar likely reaching about US88.35¢, at which point it could break higher to test the US92.35¢ level.

"The U.S. dollar is continuing to slide as investor appetite is gaining momentum," Mr. Curran said. "People are getting comfortable about taking on a little more risk."

The rise in the Canadian dollar has moved in lock-step with the improvement in equity markets since March 9. Over this time, the S&P 500 has risen by 34%, the S&P/TSX composite index has gained 35% and the Canadian dollar has increased by 14%, equal to almost US11¢. Since Feb. 18, light-crude oil has risen by 46% to US$62.12.

But as risk appetite and equities improve, Mr. Curran said it was unlikely the U.S. dollar would embark on a long-term decline.

"While things are beginning to thaw, it doesn't mean it's full-on summertime just yet," he said. "A lot of people are looking for the Canadian dollar to strengthen dramatically again towards par. I'm not sure about that just yet."

Nevertheless, concern has been mounting that the increasing U.S. debt load, as well as a potential inflation time bomb in the form of the quantitative easing, could drag down the greenback. Garnering attention is the risk the United States could lose its triple-A sovereign credit rating, which reflects the chance of the borrower defaulting on its debt.

"By many measures, the U.S. appears just a few short steps away from losing its coveted triple-A status, unless the recovery turns out to be considerably stronger than expected and the fiscal repair is faster than commonly expected," said Douglas Porter, deputy chief economist at BMO Capital Markets. "A downgrade could boost the cost of funding U.S. debt at the margin, but underlying inflation and fiscal fundamentals will ultimately be the primary driver."

Despite the risk, Paul Ashworth, chief economist at Capital Economics, said the United States was unlikely to lose its rating. But, in the event of a downgrade, he said it would probably not have a lasting impact on the U.S. dollar.

However, he said a big threat lurked in the country's expanded monetary base, which now stands at about US$1.8-trillion. While the expanded monetary base was needed to feed economic growth and ward off deflation under the Fed's quantitative easing plan, Mr. Ashworth said such high levels could fuel rampant inflation once broader monetary conditions improved.

He said it remained to be seen how much success the Fed will have when it decides to end its quantitative-easing plan and shrink the monetary base.

Gold, Commodities Rise As Dollar Plunges

GoldDollar

More Trouble for the Dollar

The Dollar hit a fresh low for 2009 today, breaking through support.

from Barrons:

CHINA ISN'T JUST TALKING ABOUT supplanting the dollar as the center of the international monetary system. It is taking concrete steps away from the greenback for both finance and trade.

The Financial Times reports China and Brazil have discussed using their own currencies for trade, a marked shift away from the use of dollars, the norm for the conduct of international trade.

There have been proposals over the years to use currencies other than the dollar for trade, most notably by the Organization of Petroleum Exporting Countries. OPEC has made noises about pricing its oil in a basket of currencies or perhaps the euro to offset the cartel's currency losses when the greenback would take one of its periodic headers.

But nothing ever has come of those threats. And even with the introduction of the euro as the first, real potential rival, world trade continues to be conducted overwhelmingly in dollars.

The global use of dollars has been an enormous advantage to the U.S., affording the nation the ability to spend and borrow nearly without limit. As long as the rest of the world wanted and needed dollars for trade in goods and financial transactions, America could effectively just reel off greenbacks to pay its bills.

Dollar Testing Support

This is causing a surge in commodity prices!

Brazil, China Move to Dump the Dollar

from Financial Times:

Brazil and China will work towards using their own currencies in trade transactions rather than the US dollar, according to Brazil’s central bank and aides to Luiz Inácio Lula da Silva, Brazil’s president.

The move follows recent Chinese challenges to the status of the dollar as the world’s leading international currency.

Mr Lula da Silva, who is visiting Beijing this week, and Hu Jintao, China’s president, first discussed the idea of replacing the dollar with the renminbi and the real as trade currencies when they met at the G20 summit in London last month...

Mr Zhou recently proposed replacing the US dollar as the world’s leading currency with a new international reserve currency, possibly in the form of special drawing rights (SDRs), a unit of account used by the International Monetary Fund.