U.S. Dollar in First Quarterly Loss since 2008

... U.S. dollar drops against Euro for quarter



The dollar rose versus the euro on Tuesday amid renewed risk aversion after a report showed an unexpected drop in U.S. consumer confidence in June.
The weak confidence report sent U.S. stocks lower and put a halt to an early sell-off in the greenback. Analysts also said the simultaneous end to the month, quarter and half-year led to increased volatility in foreign exchange trading, exacerbating intraday moves in currencies.
The decline in consumer confidence "was a big shocker," said Kathy Lien, a director for currency research at GFT Forex in New York. "The weaker confidence number should help the dollar recovery for the rest of the day."
The Conference Board's U.S. consumer confidence index fell in June to 49.3 from a downwardly revised 54.8 in May, the private business research group reported on Tuesday. Economists polled by Reuters had forecast a reading of 55.0.
The confidence index followed a report showing a smaller-than-expected dip in U.S. home prices in April and a report on business activity in the U.S. Midwest.
In midday trading in New York, the euro was last down 0.4 percent at $1.4010 after trading as high as $1.4152 earlier, according to Reuters data.
Despite Tuesday's gains versus the euro, the dollar was still on track for its first quarterly decline against the single currency since the first quarter of 2008.
At the same time, an index measuring the value of the greenback against a basket of major currencies declined about 6 percent for the quarter, its first quarterly drop since the first three months of 2008. The index was last up 0.5 percent at 80.235.
"The greenback has clearly become oversold," said Michael Woolfolk, senior currency strategist at The Bank of New York Mellon, in New York. "It appears that the consumer confidence report provided players with an opportunity to take profit on short dollar-positions."
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Investors have sold U.S. dollars recently as stock markets and oil prices rose on an upbeat view for prospects of a global economic recovery and hurt demand for the greenback as a safe haven.
The MSCI global stocks index was on course for its best quarter since its launch in 1988, up 20.9 percent at current prices, while oil earlier hit an eight-month high of $73.38 a barrel.
"The second quarter was great for stocks and there have been signs things are getting better in the financial system," said Meg Browne, a currency strategist at Brown Brothers Harriman in New York. "Altogether, this is encouraging news and the reaction to the positive outlook in the markets has been to sell the dollar and buy foreign currencies."
Some currencies, such as the Australian dollar, soared during the second quarter. The Australian dollar gained 16.5 percent versus the U.S. dollar in the past three months, its best quarterly performance since it became freely floated in 1983. The Australian dollar was last down 0.1 percent at $0.8058.
The expectation of global economic improvement gained support from the CBOE Volatility Index, Wall Street's so-called fear gauge, which dipped to its lowest level since just before Lehman Brothers collapsed last September.
"The move back in the Vix levels pre-Lehman is a result, a by-product of the overall improvement in outlook," Browne said

How Long Can U.S. Dollar Resurgence Last?

Some people have been caught off guard by the continuing strength of the U.S. dollar, as most that understand the source of its weakness have predicted its continual plunge, especially after the trillions in obligations the U.S. government has committed itself to recently.

A couple of major factors have been responsible for its current strength, although it's only a matter of time before the piper will have to be paid.

One major reason for retaining its strength has been the countries that had lagged behind the U.S. in economic disaster have now come around full circle and are beginning to participate in the global economic tsunami. That has made some other currencies struggle as well.

This week the International Monetary Fund (IMF) said the economies of the UK and Europe will sputter during 2009, along with the U.S.

The other key to a stronger dollar has been investors deleveraging the investments in dollar-denominated commodities, as well as dollars being sold to acquire stocks. Related to this is institutional investors ridding their funds of positions in emerging markets. This has been going on since about the middle of September.

Investors are now in the position of having to buy U.S. dollars so they can unwind those trades.

All of this is simply suspending the day of reckoning for the dollar. The question isn't whether it will happen, the question is when and how deep the shattering of the greenback will go.

Nothing has really changed in the positive for the dollar since its 6-year decline began against its major trading partners. Only lagging behind the economic disaster in America, and now fully partaking in it, has saved the dollar as its trading partners struggle.

Once this changes and demand for goods and services begin to rise again, all bets are off as to how the dollar will respond. The bursting of the commodities bubble is only temporary, as nations will once again start building and need a variety of goods to grow their economies. At that time we'll begin to learn how deep the disease of the troubled U.S. dollar will really be.

Dollar Strengthens Against Euro as European Economic Fears Mount

Mounting fear that the European market is about to partake in similar results as the U.S. market, has the euro continuing to fall against the U.S. dollar. Today it dropped to a 13-month low of $1.35 against the greenback.

The problems in the European market have been slower to emerge than in the U.S., and now it seems it's about to participate in the same problems.

This has continued to pummel commodities as investors are now eyeing dollar-denominated short-term paper like U.S. Treasury bills.

With the dollar continuing to strengthen, it has left gold in a much less important position than it would usually hold when people are looking for a safe haven for their capital.

Until the U.S. dollar drops again, this will continue to be the way the market moves overall.

While it's difficult to ascertain, it looks like a significant number of overseas U.S. dollars are being brought back into the U.S. at this time.

U.S. Dollar Falls Against Most Major Currencies on Geo-political Concerns and Rising Oil Prices

Ongoing bad economic data as well as rising oil prices related to geo-political tensions are driving the U.S. dollar down, as it fell against most major currencies on Thursday.

Oil prices have had a direct impact on the strength or weakness of the dollar, as its recent strength correlated with dropping oil prices, and the increase in oil prices is now again putting downward pressure on the greenback.

"The sharp drop in crude prices single-handedly triggered the sharp dollar rally between July and mid August. Now that oil prices are creeping higher once again, it would only make sense to see the U.S. dollar slip as well," wrote Kathy Lien, director of currency research at GFT, in a note to clients.

A report from the Conference Board added pressure to the dollar, as leading economic indicators dropped by 0.7 percent in July, raising the possibility that the economy could flatten out for the rest of 2008.

Manufacturing in the northeast U.S. also continues to drop for the ninth month in a row, although it did slow down in its contraction so far in August, according to the Federal Reserve Bank of Philadelphia.

Continuing problems in the finance and mortgage industry are also keeping pressure on the dollar, as concerns over Fannie Mae (NYSE:FNM) and Freddie Mac (NYSE:FRE), and other financial institutions aren't letting up.

Reports that Lehman Brothers (NYSE:LEH) held secret negotiations to sell up to have the shares in the company to Asian concerns didn't help spark confidence in the sector.

Uncertainty over U.S. Dollar Continues

The U.S. dollar hovered near a record low against the euro on Tuesday, not long after rising after the U.S. Treasury and Federal Reserve announced emergency plans to help shore up investor confidence in Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE).

Some investors weren't convinced though, as Hiroshi Yoshida, a trader at Shinkin Central Bank said, "It's difficult to actively buy the dollar just because of government support measures, because there are other factors weighing on the dollar, such as worries over the health of financial institutions and rising oil prices.

"The key is his view on inflation. If the market perceives Bernanke to be cautious about raising interest rates, it may add more momentum to dollar selling against the euro."

After the FDIC seized IndyMac Bancorp - as investors swarmed the bank in a panic withdrawing funds on the bank run - stocks in the sector plunged, causing even more instability in relationship to confidence in the U.S. dollar.

As a result, the U.S. Treasury increased its direct credit lines to Fannie Mae and Freddie Mac, adding that they'll buy up shares in the companies if they need to.

Concerning the euro, traders think the euro could rise even higher against the U.S. dollar if the European Central Bank raises interest rates later in 2008.

Investors Ignore G-7 Currency Shift

Seeming to think the the warning by the G-7 about steep fluctuations in the exchange rates could cause harm to the global economy, French Finance Minister Christine Lagarde talked down to investors saying they don't understand the significance of the G-7's shift in its outlook on exchange rates.

That was in response to the ongoing decline of the dollar which is starting to impact exports from the strengthening currencies of other countries.

Legard said in an interview: "It's a strong statement which I am not sure the markets have yet fully understood and appreciated."

My thought is: Who cares? That's why it's called a market, and market forces are impacting the currency rates; that's how it should be. To attempt to strenghthen the U.S. dollar so European companies can benefit doesn't do anything for Americans.

Until there are real actions taken, rather than just talking the talk, most investors aren't going to sell their euros or other strong currencies in order to listen to some bureaucrats who want their interests to be put ahead of others.