There are a number of fundamentals which indicate to me that the dollar is set to depreciate in a trend, at least over the next few months. Also, the S&P is making a crucial technical test which indicates that the rally which began with Bernanke’s admission of electronic printing is still intact.
The most obvious fundamental is the Fed’s continued use of the “extended period language,” which has now been in use for about a year. Even more importantly, the likelihood of the Fed making a move this year, or even signaling that it will, is virtually nil.
Inflation will be well below the area that the Central Bank wishes it to be. Core PCE, the Fed’s preferred gauge of inflation, looks to be in a range of between 0.9% and 1.2% for the year, well below the 1.8% to 2.0% it wants.
Unemployment is likely to remain high this year, and will probably finish no lower than 9.5% or so. The administration itself admitted this yesterday with its curious statement (actually a joint statement issued by Treasury Secretary Tim Geither, White House budget director Peter Orszag and Christina Romer, chairman of the Council of Economic Advisers) which said that unemployment is expected to “remain elevated for an extended period.”
Reading between the lines of this statement indicates to me that Mr. Obama now sees the democrats as being in extreme distress in terms of the mid-term elections this November, and probably views his Presidency in peril for the 2012 re-election as well. People vote their wallets and as long as they feel light, incumbents will remain at risk.
The quickest solution to the unemployment problem is to import as many jobs as possible, which is best accomplished by depreciating the currency. Mr. Obama appointed a Fed Chairman who no doubt shares this view since he’s done everything in his power, including going on T.V. to admit printing dollars, to weaken the dollar.
The President will also be appointing notable dove Janet Yellin to fill the vice-Chairman’s seat being vacated by long-time Fed Donald Kohn, and he’ll have the opportunity to appoint 2 more Feds which means that the FOMC will be well-stocked to resist the more hawkish views of the regional Fed Bank presidents like Thomas Honig.
Additionally, we now have congress getting serious about the need for yuan appreciation. Five senators including Charles Schumer of New York and Lindsey Graham of South Carolina introduced legislation yesterday to make it easier for the U.S. to declare currency misalignments and take corrective action. Simply put, Obama’s goal of doubling U.S. exports in five years depends on his ability to get China to raise the value of its currency. And as Economist Paul Krugman mentioned recently, the dollar will depreciate against major currencies such as the euro when this occurs.
Basically what we have is the President, the Congress and the Federal Reserve all on board publically that their intention is to weaken the dollar going forward.
Do you want to bet against this?
As far as the S&P 500 is concerned, it recently made a double top at the Jan. 19th high. Yesterday, it broke through that resistance. What we could see over the next few days is a test of this former resistance as support, which I believe will be found. And as stocks gain, the dollar will trend lower.
Did I mention that the Greek debt crisis is over for now?
The euro has already started to gain against most major currencies after European finance ministers worked out a strategy for emergency loans to and Standard & Poor’s affirmed the nation’s credit ratings. According to Bloomberg, global investors bought more euro-region equities than they sold for the last two weeks after having been net sellers the preceding 23 weeks on concerns a default in Greece would spread to other euro-region members including Spain and Portugal.
Rising equities will pressure the euro higher.