Tuesday April 19, 2005 - 11:13:29 GMT
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Black Swan Capital - www.blackswantrading.com
PPI dollar driver?
“Let us have the courage to stop borrowing to meet the continuing deficits. Stop the deficits.”
Franklin Roosevelt, 1932
Today, it all hinges on the Producer Price Index—some say. A look at PPI All Commodities (red line is the monthly period to period at an annualized rate; the blue line represents a euro EURUSD):
chart: ppi vs euro
I’m not sure if there is much of a correlation there…but if we played around with the series long enough, we could probably create one.
I think the story on the dollar, at least over the intermediate term, is more simply about two factors from here on out:
1) Interest rates
2) The dollar’s world reserve currency status
We have recently been told the ECB will probably remain on hold through the remainder of the year. The commodity dollar countries—Australian, New Zealand, and Canada seem to be feeling a whiff of slowdown from Asia. So we can no longer place them in the aggressive category. The BOJ is on hold at zip. Switzerland appears to be in the same boat as the ECB. The UK?
Despite the news on PPI today, the Fed will continue to hike rates. A slower US economy: maybe? Higher relative interest rates supporting the dollar: most probably!
By default, and despite the many financial warts associated, the US dollar is and will remain the world’s reserve currency for a while longer. Why? Safety, as measured by capital market liquidity and depth. And in a financial world leveraged to the gunnels—consider that hedge fund assets have QUADRUPLED since 1998 to $615 billion as of last September—the place to hide most of these funds in times of trouble and despair (as we talked about in yesterday’s Currency Currents) is the good old US.
It is a simple story. I’m sticking to it until the reasons for the story change.
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