The Falling Dollar

The dollar fell to a four-month low against the euro and weakened versus the yen on speculation the U.S. government’s creditworthiness is deteriorating, sapping demand for the U.S. currency.

The yen advanced to a nine-week high versus the dollar after Japan’s Finance Minister Kaoru Yosano said the government isn’t planning to intervene in the currency market. The dollar headed for its biggest weekly loss in two months versus the euro after Standard & Poor’s yesterday cut its outlook on the U.K.’s AAA credit rating to “negative” from “stable,” raising concern the same may happen to the U.S. South Korea’s won led Asian currencies higher as regional shares gained.

“Dollar sentiment is particularly bad,” said Sean Callow, a senior foreign-exchange strategist in Sydney at Westpac Banking Corp., Australia’s biggest lender by market value. “A lot of Treasuries are held by foreign investors and any concern about the value of U.S. debt will have a massive impact” on the U.S. currency.

The dollar declined to $1.3930 per euro as of 12:45 p.m. in Tokyo, after dropping to $1.3955, the lowest since Jan. 5. The U.S. currency has slumped 3.2 percent this week, heading for the biggest loss since the five days to March 20.

The yen rose to 94.12 per dollar, after reaching 93.87, the strongest since March 19. The yen traded at 131.18 per euro from 131.15. The won gained 0.6 percent to 1,240.90 per dollar.

The dollar weakened versus 14 of the 16 most-traded currencies after U.S. Treasury yields yesterday rose the most in two weeks on concern the government will not be able to fund its fiscal spending.

“The urgency for money managers with large U.S. dollar holdings to diversify could well intensify,” analysts led by Callum Henderson, global head of currency strategy in Singapore at Standard Chartered Bank, wrote in a note today. “The first considerations will likely be hard currencies that are liquid. On these counts, the likes of the euro, yen, Australian dollar and Canadian dollar will win out.”

The cost to protect buyers of U.S. sovereign bonds for five-years climbed to a two-week high, indicating deteriorating investor perception of the nation’s credit quality. U.S. credit- default swaps rose to 37.745 yesterday, the highest since May 4, from 34 on May 20, according to CMA DataVision. The five-year CDS price for Japan fell to 50 from 50.06 on May 20.

The dollar touched a four-month low of 1.0895 Swiss francs from 1.0936. The U.S. currency fell to C$1.1335 from C$1.1374 yesterday, after reaching $1.1328, the weakest since Oct. 14.

The U.S. currency also fell for a fifth day versus the euro after Bill Gross, the co-chief investment officer of Pacific Investment Management Co., said the U.S. will “eventually” lose its AAA rating.

“The markets are beginning to anticipate the possibility” of a U.S. credit rating-cut, Newport Beach, California-based Gross said in an interview yesterday on Bloomberg Television. “It’s certainly nothing that’s going to happen overnight.”

The pound traded at $1.5859 from $1.5844 yesterday. It earlier climbed to $1.5897, the highest level since Nov. 6. The currency slumped as much as 1.5 percent yesterday after S&P lowered its outlook on U.K.’s credit rating and said the nation faces a one in three chance of a rating cut.

Investors also sold the dollar after the failure of BankUnited Financial Corp. added to concern the banking system in the world’s biggest economy remains weak.

BankUnited was in an “unsafe condition” and the quality of its loan portfolio had deteriorated, the Office of Thrift Supervision, the lender’s main regulator, said yesterday. BankUnited joined 33 U.S. banks and at least five credit unions that have gone under since January.

The administration of President Barack Obama will sell a record $3.25 trillion of debt in the fiscal year ending Sept. 30, according to Goldman Sachs Group Inc. The U.S. Treasury reported the first budget deficit for April in 26 years, recording a $20.9 billion shortfall.

The Dollar Index, used by the ICE to track the U.S. currency versus the euro, yen, pound, Swiss franc, Canadian dollar and Swedish krona, declined 0.3 percent to 80.327 after dropping to 80.21, the lowest since Dec. 29.

The yen headed for a thirdly weekly gain versus the greenback after Japan’s Finance Minister Yosano said the “government isn’t considering currency intervention at this point.” Policy makers haven’t fully analyzed why the yen is gaining, he said at a press conference today in Tokyo.

“We are seeing the appreciation of the yen, but mainly because of the negative views on the U.S. economy,” said Susumu Kato, chief economist in Tokyo at Calyon Securities, the investment banking unit of Credit Agricole SA. “It would be hard for the Japanese government to change the direction of the market because it’s more of a dollar-weakness issue rather than a yen-strength issue.”

The Bank of Japan kept its target lending rate at 0.1 percent at a policy meeting today and raised its economic assessment for the first time since July 2006. The central bank also said it will accept foreign debt owned by banks as collateral for loans.

The Korean won headed for a weekly gain as overseas investors added to their holdings of the nation’s shares for a sixth straight day.

“The won’s attempt to break the 1,230 level is under way,” said Ko Yun Jin, a currency dealer at Kookmin Bank in Seoul, the nation’s biggest lender. “There has been a tug of war between importers and exporters, which will keep the currency in a relatively narrow range” between 1,230 and 1,260.

The currency rose 1.3 percent this week, taking its gain for the past three months to 21 percent, Asia’s best performer.

(from Bloomberg, May 21, 2009)

Robert Prechter: "the difficulties will probably last through about 2016... There will be plenty of rallies along the way."

Longtime technical analyst Robert Prechter, who forecast the 1987 stock market crash, predicted this week that U.S. equities may plunge to half their lows hit in March as a deflationary depression bites.

Oil and U.S. Treasury bonds are also locked in long term bear markets, while corporate bond prices will plunge precipitously by next year as broad economy, banking system and company earnings sustain more damage from a financial crisis that's akin to the Great Depression, he said.

The U.S. S&P 500 stock index's .SPX rebound by nearly 40 percent since it sagged to a 12-year closing low of 676 points on March 9 is not sustainable, Prechter said in an interview with Reuters.

"It's not the start of a new bull market," said Prechter, chief executive at research company Elliott Wave International in Gainesville, Georgia. "Our models are (showing) right now that it is a much bigger bear market than most people realize, something along the lines of 1929-1932," he told Reuters in a wide ranging interview. "It's a very rare event," he added.

"I think the next leg down will be at least as severe if not more severe than what we just experienced. So you want to stay on the side of safety," he said.

As in his 2002 book "Conquer the Crash," which warned of the dangers of a U.S. debt bubble and deflationary depression, Prechter continues to advocate safer cash proxies such as Treasury bills.

SEVEN MORE YEARS?

Riskier assets such as commodities, corporate bonds, and stocks which are currently anticipating that the severe global economic downturn may be bottoming, are likely to have short lived intense rallies, but within an inexorable long-term decline that may last another seven years, he said.

As banks continue to accumulate losses and corporate earnings fall, "the difficulties will probably last through about 2016," he said. "There will be plenty of rallies along the way."

Oil may rally further from current levels just below $60 per barrel but the upside will be capped at about $80 per barrel as the commodity is locked in a long-term bear market, he said.

In July, U.S. crude oil hit a record peak above $147 per barrel and was just above $57 per barrel around noon on Thursday.

"Deflation is coming, it's going to lead to a depression. We're not at the bottom yet," Prechter said. "I think we are going to have bouts of deflation separated by recoveries."

Prechter also painted a bleak picture for commodities like silver and is largely unenthusiastic about gold, believing the precious metal made a major peak when it rose above $1,000 last year.

While gold may have already topped at above $1,000 an ounce in March 2008, Treasury bond prices are likely to fall in a long term bear market, with huge government debt issuance being the main catalyst.

The benchmark U.S. 10-year Treasury note yield, which moves inversely to its price, hit a five-decade low of 2.04 percent in mid-December.

"People got very enamored with bonds and very enamored with gold and I don't like to be invested in markets that are over subscribed," Prechter said.

"The Treasury (Department) has taken on so much bad debt" at a time tax receipts are falling, that "there will be a slow, but very steady change in the way people will view the U.S. government," said Prechter. As a result, investors in Treasury notes and bonds will ultimately demand higher yields, he said.

The U.S. central bank will not be able to control the government bond market and prevent yields from rising, regardless of how much money the Fed uses to buy Treasuries, he added.

Next year, U.S. corporate bond prices will probably fall below their extreme price lows of December during the market panic of 2008 when investors fled riskier assets, he said.

"Corporates in terms of price have the big wave down coming. This has been a prequel," Prechter said.

"Many corporations who (now) say we can borrow more money and take more risks: those are the ones who will get in trouble," he said. "Many municipalities will default," he added.

(from Reuters, May 14, 2009)