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Wednesday May 4, 2005 - 11:18:23 GMT
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Dollar dives on Fed Ooops!


"The real secret of stock market success still remains (and probably will remain) locked up in the bosoms of a few who are too busy to write, and too rich to feel the need of writing.”

Henry Howard Harper, The Psychology of Speculation

FX Trading

“Oops! Sorry. We forgot a little sentence. It reads: Longer-term inflation expectations remain well-contained". And another sentenced added even later by the FOMC that the press failed to notice was this: “P.S. There really is a Santa Claus.”

You gotta love it! Twelve grown economists on the Fed Open Market Committee pouring through every nook and cranny of the US economic data—no stone left unturned in the pursuit of monetary policy to guide the masses. Yet, all twelve miss that sentence? It makes one wonder out loud: Are these guys as clueless about the direction of the economy as everyone else?

The Wall Street Journal carried the reaction of several economists to the Fed statement yesterday, our favorite camd from Ian Shepherdson, High Frequency Economics:

“The net effect of this is to make the Fed's message a bit less stark, but the clear signal remains that (a) rates are still too low (b) inflation pressures are building and (c) the slowdown is nothing like severe enough to induce a pause in the rate hikes. Conspiracy theorists will likely have a field -day with this bizarre turn of events [the additional sentence about inflation expectations and Santa Clause], but we think that old-fashioned human error is more likely the story.”

So there we have it. To err is human. More validation for Milton Friedman’s suggestion on how to run the FOMC many moons ago. He believed it would be a lot more efficient and “transparent” to have a computer replace the twelve grown economists on the committee. The computer would simply buy and sell Treasuries in an amount necessary to maintain a stable and growing money supply in proportion to support the natural long-term growth rate of the US economy. No one would be confused about policy. And there would be no need to parse [read guess the real meaning] of every utterance from the FOMC. But you have to admit, it‘s a lot more fun the way it is now. How else would we have learned there really is a Santa Claus?

The dollar got whacked last night in Asian trading on the Fed news. The market seems to have expected a little more aggression from the Fed—me too. Now sentiment seems to have shifted, where temporary or not we don’t know, to a Fed that will slow its rate hike campaign. Bond King Bill Gross said the same yesterday on CNBC before the FOMC statement was issued. And he is no slouch when it comes to interest rate forecasting.

But the bottom line is that the US economy is in a soft patch and may rebound. Europe and Japan are in the doldrums and may slip into full-blown recession. The Fed is raising interest rates. The ECB and Japan are not. In fact, some are already talking about an ECB rate cut.

The following tibits of ugly stats on the European economy come from a recent issue of Weldon’s Money Monitor:

“Following the release of the NTC-PMI Survey results for April, sentiment is intensifying rapidly, as we note comments from NTC Chief economist Chris Williamson …

“What we are seeing now is a downward trend becoming increasingly entrenched in the euro area. It is too early to say we are in a recession, but we are in a situation where the chances of a recession have increased. We are moving into rate cut territory.

“Indeed, note these dynamics as apply to this morning’s data:

• French Business Confidence hit an 18-month low
• German and Belgian Confidence hit a 19-month low
• Eurozone Confidence lowest since Sept-2003
• Headline indexes now CONTRACTING, posting sub-50 readings across the board.
• Input prices hit a 15-month low
• Employment Indexes hit new lows, with the Eurozone reading posting its 47th consecutive sub-50 reading.
• Netherlands Employment at 16-month low
• German Employment at a 17-month low
• Spanish Employment at a 22-month low

”The economic erosion in Europe is BROAD-BASED, and INTENSIFYING at an ACCELRATING pace.”

As much as we understand the market’s disappointment with the Fed’s inability to convey a clear message, or show confidence in whatever belief they do have, we wonder how long the euro can be a viable alternative to the dollar given the relative economic growth and interest rate comparisons which so clearly to favor the buck—soft patch or not. But it’s not always facts and the real world that drive currencies—sentiment is the key. As George Soros stated too perfectly in his book, Alchemy of Finance:

“Financial success depends on the ability to anticipate prevailing expectations and not real world events.”

That’s probably a good thing, because the Fed seems to be operating in La-La Land anyway.

Jack Crooks


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