"Altruistica": Seeking a return to full financial disclosure and regulatory oversight. A financial market analysis blog for "entertainment purposes" only by an experienced CFA seeking new hedge fund engagements for investment writing and analysis. The author has experience investing internationally, running a hedge fund, making angel investments, and helping launch five startup companies. Investors should do their own due diligence.

03 January 2007

Dollar May Fall On Report Showing U.S. Manufacturing Weakening

This Bloomberg report again perpetuates the fallacy that the Fed can CUT rates while the ECB is raising them. The ISM data was reported at 51 with "new orders rising" but is likely to fall into the 40s during Q107 as the manufacturing slowdown intensifies, as the downturn in housing deepens. The housing numbers were weak, business investment was weaker, vehicles sector is cutting back and home improvement spending will drop 10-15% Y-Y. The idea that foreign holders of dollar denominated assets will continue to tolerate a depreciation of the so-called "reserve currency" is a fallacy. More likely, central banks will shift reserves from dollars to euros.
Jan. 3 (Bloomberg) By Daniel Kruger-- The dollar may fall ahead of a report expected to show the U.S. manufacturing sector slowed in December, adding to speculation the Federal Reserve will lower interest rates later this year. The Institute for Supply Management will probably say U.S. manufacturing didn't expand last month, after contracting for the first time since April 2003. The survey may show a reading of 50, the dividing line between expansion and contraction, for December, compared with 49.5 in November, according to a Bloomberg News survey of economists. ``If you see a weak ISM that could push the dollar lower,'' said Daniel Katzive, a currency strategist at UBS Securities LLC in Stamford, Connecticut.

The dollar traded at 118.83 yen at 6:31 a.m. in Hong Kong from 118.85 yesterday. The dollar traded at $1.3277 per euro from $1.3273 late yesterday in New York. The yen was unchanged at 157.75 per euro. The yen touched 157.90 per euro yesterday, a new low against the 13-nation currency. Financial markets in Japan are closed for a third day for a bank holiday after the start of the new year. The U.S. central bank will reduce its overnight lending rate between banks by the end of the year to 4.75 percent, according to sixteen of the 22 so-called primary dealers, including Citigroup Inc., Deutsche Bank AG, Goldman Sachs Group Inc. and UBS Securities LLC, who trade directly with the Fed. The Fed has kept its overnight lending rate unchanged at 5.25 percent at its past four meetings, ending a two-year cycle of borrowing-cost increases.

U.S. economic expansion slowed to 2 percent in the third quarter, and 2.6 percent in the second quarter. ``It's not only expectations of interest rate cuts by the Fed but anticipation of interest rate increases by the ECB,'' said Mark Meadows, an analyst at currency-trading company Tempus Consulting in Washington. ECB Policy makers lifted their benchmark refinancing rate by a quarter percentage point to 3.5 percent on Dec. 7, the sixth rate increase since December 2005. The yield premium investors earn on benchmark two-year U.S. bonds over similar-maturity German bunds was 0.93 percentage point yesterday, compared with 0.909 percentage point on Dec. 29.

The euro extended its gains yesterday after ECB council member Erkki Liikanen suggested in an interview with broadcaster YLE that wage demands in Germany may spark inflation. ``Certainly the ECB will increase rates,'' said Matthew Lifson, chief currency trader at PNC Capital Markets in Pittsburgh. ``It's really an interest rate play'' that's benefiting the euro. Growth in the euro region was 2.7 percent in the third quarter. The Eurostat in Luxembourg releases the final estimate of third-quarter GDP next week. The jobless rate in Germany fell to its lowest in more than four years in December, a government report tomorrow may show, according to a Bloomberg survey of economists. The European currency last year gained the most against the yen since its debut in 1999 as the ECB raised rates five times, compared with a single increase by the Bank of Japan. The yen fell 11.2 percent against the euro and 1.1 percent against the dollar in 2006.

Talk that Hank Paulson is quietly negotiating to allow for a tax increase for the wealthiest Americans is interesting, even though the Bush "give it all to the rich" lobbyists will call it blasphemy. Of course, it would also contradict his dogma from his summer 06 confirmation hearings, as the WashPost quipped "Paulson Sticks to the Script":
Would I like spending to be less? Yes. Would I like the deficit to be less? Yes," said Paulson, who has been chairman and chief executive of Goldman Sachs Group since 1999. "But it's manageable . . . and we can attack it best with a strong and growing economy." Raising taxes, he said, "would be counterproductive" by hurting growth. Again echoing long-standing views expressed by Bush and other administration officials, Paulson said the nation should put a high priority on reducing the costs of Social Security and Medicare as the baby-boom generation retires. The sooner the retirement and health-care issues are tackled, "the less costly will be the ultimate solution," he said.


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