Friday 19th Nov: Dollar shorts unwound ahead of G-20

Traders were unwilling to take too many risks ahead of the G-20 meet in Berlin and the European Banking Congress in Frankfurt on Saturday where Fed Chairman Greenspan and ECB Prez Trichet would address on “Euro in wider circles”.
This would be to acknowledge Euro’s pre-eminence in the Euro bond market.
The unwinding of dollar shorts gave greenback some respite amidst a clutch of disappointing data from US. Euro hit a record high of $1.3075, notching up gains of nearly 7% from its low of $1.22 levels in October. Weekly U.S. jobless claims fell, but the US leading indicators fell for a fifth straight month by 0.3% (forecast 0.1%). The Philly Manufacturing index fell to 20.7 in November (previous 28.5) with only the employment component showing a rise.
But with markets focusing on global forex policy, dollar showed little reaction to economic data. Despite dollar's rebound, it will remain under pressure because of the burgeoning current account deficit.
The only silver lining (if any) could be the elections in Iraq going smooth in January'05 which may be positive for dollar in the medium term.

Thursday 18th Nov: Greenback “Snowed” under

The US treasury Secretary John Snow’s symbolic strong dollar rhetoric did not hold much water with the currency traders as it was followed by an exhortation to Euro zone to share “joint responsibility” in the current account deficit woes of the US and shore up their domestic growth prospects instead.
Traders saw through these ambiguous verbal exercises and drubbed the dollar as Euro touched the till now unassailable 1.30 mark (9 year highs), and Yen reached a fresh 7-1/2 month high of 103.78 emboldened by silence from BoJ who have not intervened till now.
Aussie and the cable did well for themselves by notching up the 0.78 and 1.86 mark.
Positive data from US did nothing to support the dollar as surging energy costs drove up U.S. consumer prices a hefty 0.6% in October (forecast 0.4%), but excluding food & energy rose a moderate 0.2%. Industrial output and housing starts rebounded strongly from the previous month, which climbed 0.7% (expected: 0.3%) and 6.4% (highest in 10 years) respectively and capacity utilization edged up to 77.7% from 77.2%.
But these were merely brushed aside as a renewal of activity after the spate of hurricanes.
The G-20 meeting over the weekend possibly weighs on the “I” word (intervention) by central banks, which may reiterate the G-7 statement of asking countries to adopt more flexible foreign exchange systems and to curb excessive volatility.
For a doctor in economics who was taught by two Nobel Prize winners, John Snow appears to display a weak grasp on the fundamentals of the science.
When asked this morning, as United States Treasury Secretary, why Washington is adhering to a strong dollar policy, he could answer only: "Because that's our policy."
An inquiry of whether America secretly supported the currency's decline was met thus: "No one has ever devalued their way to prosperity."
The markets were unconvinced, sending the dollar lower. For Mr Snow was wrong or, at least, disingenuous. While devaluations rarely accompany economic success, they are often a symptom rather than a cause of crisis.
Indeed, consider the doubling in the size of China's economy over the last nine years. As industrial powers, including America, have noted, China has exploited an undervaluation – if not devaluation - of the yuan of perhaps 40 per cent below the level it would achieve on a free market to support the surge in exports behind growth running at more than 9 per cent a year.
So, my oh my, the dollar fell against the euro and hit a seven-month low against the yen. Which, of course, is what the Treasury Secretary wanted.
Snow will not fall on questionable economic analysis. But the dollar will, improving America's trade position and, crucially, devaluing the value of the dollar debts at the root of its wobbly finances.
The trouble is, of course, where Mr Snow's comments have left the euro – at a record high - and hopes of a revival in the eurozone economy - at a new low. Data last week showing a fall to 1.2 per cent in eurozone annual economic growth reflected the weakening prosperity of the region's exporters, notably in Germany, where foreign markets have protected manufacturers from a paucity in domestic demand.
No one has ever devalued their way to prosperity John Snow US Treasury Secretary
So no surprises that some of the region's biggest shots have taken aim at the weakening dollar.
"It would not be desirable that the appreciation of the euro should continue, still less that it should accelerate," Guy Quaden, a member of the European Central Bank's governing council, said.
Wolfgang Clement, the German Economy Minister, said: "I assume the ECB will act if it deems necessary." Jacques Chirac, the French President, added: "I am a bit concerned about the downward tendency of the dollar."
If that sounds tame, consider it in the costume drama terms of central banking diction. And recall the attack by Jean-Claude Trichet, the ECB president, on the "brutal" moves in the currency markets – that's wrong-side-of-the-watershed language for makers of monetary policy.
Yet however forcefully European leaders voice their objections, they will always be trumped by a disingenuous comment from an influential American. Indeed, even a threat of follow-up European intervention to bolster the euro has failed to steady the euro.
The trouble is that European leaders made a wish in launching the euro - and have had it answered. They wanted to create a currency which would rank with the dollar as an international fixture. And so the euro has.
But, in achieving only second place on the currency podium, the euro has been doomed to behave as an alternative dollar rather than a force in itself. Europe's single currency has appreciated without the underlying economic strength which such a rise would typically reflect.
It would have been easier, of course, if the eurozone's individual currencies still existed. Investors would have snapped up the Deutschemark, as Europe's strongest legacy currency. But at least, with an independent central bank, Germany could have cut interest rates to offset the impact.
Now, eurozone nations united have, ironically, little power. Not even the clout to bring a devaluation which would speed the region's way to prosperity.

Wed 17th Nov: US fundamentals optimistic, markets unimpressed

The currency markets persisted with their dollar dumping notwithstanding buoyant economic data releases from the world’s largest economy.
Producer prices registered the largest monthly increase in the last 14 years and rose 1.7% in October with the core prices rising a measly 0.3%. Moreover, the capital flows data released by the Treasury indicated a 6% surge in the foreign purchases of US stocks and bonds to $63.4 billion in September vis-à-vis a 5% decline in the previous month.
These positive fundamentals didn’t please the traders’ one bit and euro held around the 1.2950 mark. The euro zone officials at the E-12 ministers meeting commented on the rising euro but refrained from remarking on the topic of intervention.
It was noted however that the EU's Audit Commission failed for the 10th straight year to approve the EU's annual financial report citing fraud and incompetence as the ongoing reasons for the EU's ongoing failures.
The single currency would face an immediate resistance at 1.2980 and markets would await euro zone October CPI figures, which is anticipated to show a rise – an indication that ECB would be increasingly wary of talking down the currency.
Yen traded around the 7-month peak against the dollar in Tokyo trade with Nikkei flat at 11,150. Currency traders look to the G-20 meeting where the Asian Central Banks maybe pressurized to scale back their currency intervention practices.
Cable managed to hold above the 1.85 mark, prevailing over a disappointing UK housing report – UK RICS housing price survey plunged to almost 2-year bottom, falling to –42 in October against a –30 previous reading.

Tuesday 16th November: No respite for dollar

The dollar continued to trade near lows, with traders showing no respite despite strong retail sales figures from the US up 0.2% and overlooking disappointing GDP figures from the Eurozone. The dollar remained subdued, trading close to 1.2950 against the euro and falling to fresh multi month lows of 105.50 against the yen.
The major crosses traded close to their previous crosses, as markets largely ignored John Snows policy of a strong dollar. Traders remained focus on the outcome of the G-20 Finance Ministers meeting in Berlin, and possible intervention from Eurozone and Japanese officials to curb the rapid pace of appreciation.
Sterling moved marginally lower against the dollar but hit fresh month lows against the euro in anticipation of weak data releases from the UK.
Oil prices fell further to $45.60 per barrel, but bounced back marred by terrorist threats in Iraq.
The Dow and Nasdaq saw little action yesterday after having touched an 8-month high on Friday. Albeit concerns over disorderly fall in the dollar in the G-20 meet, traders are expected to continue dollar sell off focusing on structural imbalances in the US.

Monday 15th Nov: Technology helps bourses extend gains

Europe’s bourses extended their 28-month highs when exchanges opened on Monday after Wall Street’s Friday gains. Oil falling below $47 a barrel countered worries over the stubbornly weak dollar.
A barrel of benchmark US crude was 62c lower at 46.70, a six-week low while the euro skirted its all-time high in Asian trade touching $1.2998, though it eased to $1.2959.
The FTSE Eurofirst 300 rose 0.5 per cent to 1,039.27 with Frankfurt’s Xetra Dax up 0.4 per cent to 4,160.04, the Paris CAC-40 0.4 er cent up at 3,848.87 and the FTSE 100 in London adding 0.3 per cent to 4,810.2.
Wall Street started the week with broad expectations of profit-taking that never materialised, so it settled on moving higher with increasingly bold steps that gave the bulls hope and the bears reason to quibble.
By the close on Friday the Dow Jones Industrial Average was 0.7 per cent higher at 10,539.01 while the S&P 500 index put on 0.9 per cent to 1,184.17. The Nasdaq Composite added 1.2 per cent to 2,085.34.
For the week, the Dow put on 1.4 per cent while the S&P 500 advanced 1.5 per cent and the Nasdaq gained 2.3 per cent. Most of the gains came on Thursday and Friday as traders used falling crude futures to push the Nasdaq to nine-month highs and the S&P 500 to its best close in more than three years. The Dow and the S&P 500 tacked on their third consecutive week of gains while the Nasdaq Composite concluded a fourth one.
The leading sector was steel with its sole constituent Arcelor, rising 2.1 per cent to €16.43. The Luxembourg-based steel maker more than doubled its third-quarter core earnings to €1.098bn euros, helped by strong steel prices and merger benefits.
Technology is powering ahead as Infineon, the German chip maker, leads the gainers, up 2.5 per cent to €8.78, Ericsson, the Swedish telecoms company, up 2.2 per cent to €23. Helping sentiment was an well received initial public offering n Asia. Elpida Memory, Japan’s only large-scale memory chip maker, climbed on its first day of trading in Tokyo.
The only falling sector was the defensive tobacco, with Imperial down 0.5 per cent to £13.09.
Sanpaolo and UniCredito fell. The two Italian banks were again linked speculatively last week as the former poached Peitro Modiano as managing director from its rival where he headed corporate banking. A merger of the two is seen by some as an opportunity to create a national champion able to compete on the European stage.
Sanpaolo, Italy’s third largest bank, slipped on Monday though because its third quarter earnings of €266m, released after Friday’s close, were below expectations of €279m. Merrill Lynch cut its 2005 earnings per share target by 4.4 per cent to €0.86. UniCreddito was downgraded to “equal-weight” from “overweight” by Morgan Stanley after the bank’s third quarter net profit, released on Friday, rose 1.3 per cent to €455m. This was 4 per cent below the broker’s expectations. Merrill Lynch though reiterated its “buy” rating and viewed the numbers as in line with its expectations. Saopaulo fell 0.6 per cent to €10.66 and UniCredito dropped 1 per cent to €4.25.
Elan, the Irish drug group, rose 3 per cent to €23.49. Dresdner Kleinwort Wasserstein upgraded rival Serono to “add” from “hold” with a SFr794 price target. The broker said Elan’s multiple sclerosis therapy, Antegren, jointly developed with Biogen of the US, would launch in 2005 and could achieve sales of $2bn by 2009. Serono's Rebif though would hold up well with sales rising to $1.2bn by then.