Reply #8: dollar watch

[UpInArms]

http://quotes.ino.com/chart/?s=NYBOT_DX&v=i

Last trade 80.405 Change -0.007 (-0.01%)

Will A Weaker Dollar Counter Subprime?

http://www.dailyfx.com/story/topheadline/Will_A_Weaker_Dollar_Counter_1184794396804.html

With the US dollar hitting a record low against the Euro on concerns about the sub-prime sector, there are many people wondering whether more weakness is in store for the US dollar. The fear is that default after default will eventually lead to weaker spending and lower growth across the country, but many people have also forgotten the benefits that the weaker dollar can bring to the economy. With the outlook so dire, a weak currency could actually be what ends up saving the country.

In Economics 101, we learned that the biggest beneficiary of a weak dollar is the export sector. As the currency declines, the cheaper US exports appear to foreign trade partners. We have already seen recent reports confirm the theory as fact with US exports skyrocketing to a record high in the month of May. According to the US Commerce Department’s most recent trade balance survey, global partners bought $132 billion in goods from the US. It is not a mere coincidence that the dollar weakened significantly in the month of May.

Dollar Implications

With a lower dollar, things may not be as bad as they seem. There remains plenty of evidence in the economy that should keep Chairman Ben Bernanke and fellow Fed policy makers from turning significantly bearish and in turn keep the dollar relatively stabilized in the short term. Incidentally, it is also a lower valued dollar that is keeping the subprime mess from spreading any further than it already has. ISM has continued to climb while the labor market remains strong.

Here, a lower dollar has stemmed losses in the US economy as manufacturing and production have both picked up since the beginning of the year. Once again, not a coincidence, looking at raw data from the start of the year, manufacturing has shown considerable growth since dipping into contractionary levels in the month of January. After dipping to 49.3, the survey has roared back every single month with the exception of March when the survey pulled back slightly. This can only mean one thing, sector growth. The notion has been confirmed by regional surveys including the most recent New York Empire State manufacturing survey. Expected to show rather tepid growth, the regional Fed report instead showed considerable expansion in the area as the findings rose 47 percent from the previous month. Key driver: new orders. The lifeline of the manufacturing sector, it seems that a depreciated currency has lifted the sector and increased output and expansion, giving support for the overall economy. It is for this reason that Bernanke is still looking for a modest recovery over the next year.

...more...

Bernanke Shifts Tone, Sending Dollar to Record Low against the Euro

http://www.dailyfx.com/story/bio1/Bernanke_Shifts_Tone__Sending_Dollar_1184794909150.html

To the surprise of the market, Federal Reserve Chairman Ben Bernanke shifted his tone ever so slightly in his congressional testimony on the economy and monetary policy. Back in February, when he gave his last testimony, Bernanke said that the housing market was stabilizing but now he feels that the problems in housing could get worse before it gets better. The Fed’s vocal concern about contagion indicates that “in their books” the economic environment has deteriorated enough to begin considering putting growth ahead of inflation. For a central banker that wants to stake his reputation on fighting inflation, this is significant. Bernanke also reminded us that the Fed’s primary focus is on core prices and not headline prices. Even though oil prices are rising, he felt that unless we have another big jump, core prices could edge a bit lower. The Fed cut their growth forecasts for 2008 to 2.5-2.75 percent from 2.75-3 percent and increased their unemployment forecasts from 4.5 percent to 4.75 percent. The central tendency for core inflation was left unchanged at 2 to 2.25 percent for 2007 and 1.75 to 2 percent for 2008. This indicates that they expect inflation to slow over the next year. Today’s economic releases provide support to the Fed’s cautionary stance. Headline consumer prices were stronger than expected, but core prices were right in line with expectations. Even though the gain in core was slightly higher than the rise in May, it is only modestly so. Starts increased but building permits hit a 10 year low, indicating that housing continues to be a problem. Bond yields and the US dollar dropped on the back of Bernanke’s comments, but further dollar weakness could be limited by the fact at this point, the Fed can do little more than raise red flags.

...more...