Dollar Rally

The Dow sold off below 13K yesterday, foreign purchases of US securities were mixed and the market has already priced in an interest rate cut in the United States at the Fed’s next meeting on September 18.  But the US dollar has shrugged off that data and continued to remain strong, at least against every major currency except the Japanese yen.  I am particularly bullish on US Treasuries as most of the rest of the bond market is particularly illiquid and difficult to price.  Treasuries are the surest bet for investors.

The gains against the commodity currencies are especially striking.  Commodities continue to fetch high prices in the futures markets, but the currencies themselves are feeling the effects of the recent appreciation.  Canadian production has fallen as a result of the strong Loonie, and investors are becoming more wary about bets placed in New Zealand and Australia.  Fundamentally, long positions in NZD/USD appear to be the most at risk.  With traders paring back on riskier strategies and sticking to the US dollar, look for the commodity currencies to continue their falls.

The interesting thing about the strength of the dollar is the lack of good economic data to support that strength.  The CPI report was flat, and the subprime problem seems to be contagious, rather than contained.  The New York Fed was hot, buy Housing Starts fell to a 10-year low in July.  The housing sector is mired in an 18-month recession.  If the Fed needs an excuse to lower interest rates, there’s plenty of poor data it can point to.

Speaking of interest rates, I will be very surprised if we do not see one on September 18, but just as surprised if we see one before then.  Bill Poole has come out and said that it would take a calamity for the Fed to introduce an emergency rate cut.  Mark Gilbert of Bloomberg brings up an interesting point though: the liquidity injections into the market by the Fed have already brought the 4-week Treasury bill below the target rate of 5.25%.  A temporary easing has already occurred which leaves the September 18 meeting to just make it official.  And when that happens, look for the dollar to lose its support.  But not until then.