The US dollar continues to climb.


Good day. Chuck was excited to get out the door last night, and is making his annual pilgrimage down to Roger Dean Stadium to watch his beloved Cardinals. Mike and I will be splitting duties on the Pfennig during Chuck's extended absence, as I will be heading down to warmer climates myself in just over a week.

As I turned on the currency screens this morning, the dollar continues to be in the driver's seat. The dollar rally which began on Monday has taken the dollar higher vs. most of the currencies and metals. But this rally isn't dramatic, as the dollar has barely been able to add 1% to its value over the past week. And the rally isn't due to good economic data/reports here in the US, but is instead based on negative news from overseas. We've got the weekly jobs data along with a report on our Trade Balance (Deficit) for the month of January due out this morning, but I don't expect this data to be dollar friendly; so we could see an early end to this weeks dollar rally.

The Euro continued a slow slide vs. the US$ overnight after Moody's Investors Service lowered Spain's credit rating. Spanish debt was downgraded to Aa2 by Moody's, which also cut Greece's ratings earlier this week. European leaders continue to meet and try to work out a solution to the sovereign debt crisis. As Chuck reported yesterday, Portugal had a successful bond issuance, but pressures continue to build on Ireland and Greece. Up until this latest downgrade, Spain and Italy looked like they were going to be able to avoid the spotlight, and work through their problems in the background. Spain, by the sheer size of its debt, is probably the most worrisome of the group. But as usual, it looks like the markets continue to be in front of our friends at Moody's, and prices in the credit default swaps market suggest investors are not as worried about Spain as they are about Greece and Ireland. As I suggested last week, the sovereign debt crisis will continue to place a cap on any Euro appreciation vs. the US$, but the dollar also has some debt problems, so there doesn't seem to be a reason to push the euro too low either. It sure looks like we will continue to trade in a fairly tight range.

This is a change from last year, when many currency desks were predicting the euro would fall to parity or below. Our friends over at RBC increased their second-quarter outlook for the euro vs. the US$ after ECB President Trichet signaled he would be willing to increase rates. RBC believes the euro will fall to $1.36 in the second quarter, a fairly large increase from their previous prediction of $1.30. The euro has confounded most of the currency 'experts' by rising 3.9% this year.

The pound sterling had been rallying vs. the US$, but is starting to slip a bit this morning after the BOE kept its benchmark interest rate unchanged at a record low, and also left their bond buying program unchanged. This news was not a surprise, as all the economists in the latest Bloomberg survey had expected this decision. We will now have to wait a couple of weeks until the minutes of the meeting are released to see if any of the nine members of the Monetary Policy Committee were pushing for higher rates. Last month, three of the nine wanted higher rates, and the latest economic data show inflationary pressures may be building. The UK trade deficit shrank to 7.06 billion pounds in January, the smallest in 11 months. Exports were up 5.4% while imports fell 4%. The rising price of crude oil certainly helped narrow the deficit, as oil is one of the UK's top exports.

The officials down under at the RBNZ went against the grain and cut rates 50 basis points overnight. Governor Alan Bollard said the damage of an earthquake in Christchurch had forced him to make the cut in order to try and stimulate growth. He followed up the cut with tough talk regarding the economic prospects in the small south pacific nation. Bollard said the economy may contract in the first quarter due to the earthquake, as consumer confidence and spending was hit as hard as the buildings in Christchurch. But Bollard didn't suggest there would be additional cuts, and in fact signaled there would be no more interest rate changes this year. The kiwi has fallen 5.7% so far this year, and the lower rates certainly won't help it. The New Zealand dollar has long benefitted from relatively high interest rates, but that has changed with this latest move. New Zealand's rates are now low compared with the world's major economies, and are heading in the wrong direction for currency investors.

The Australian dollar has also been lower vs. the US$ this week, but got a little help from statements by Reserve Bank of Australia Governor Glenn Stevens. Stevens said yesterday that Asia would continue to be the world's engine of growth, boosting commodity prices. But recent data out of China called these statements into question. China, Australia's largest trading partner, posted an unexpected trade deficit in February. Another report earlier today had shown the labor market in Australia is worsening. Australian employment fell in February according to the report this morning. Economists had expected a rise in the number of workers, so this negative jobs report was a surprise. Currency investors now worry the RBA will hold off increasing rates, as the combination of a worsening job market and the possibility of lower growth in China have increased investors concerns.

The Chinese trade deficit is worrisome for all countries, as China has become the engine of global growth. But the Chinese deficit is actually a good thing. It shows that Chinese consumers are starting to increase purchases, as illustrated by a 19.4% increase in Chinese imports. Outbound shipments rose an annual 2.4%, the slowest pace since November 2009. Again, I think this is a positive sign, but some believe this is a negative sign since China has long been the 'low cost supplier' to the rest of the world. In years past, if Chinese exports decrease, it was a sure sign the global economy is slowing. But if you look at the huge increase in Chinese imports, the latest numbers show things may be shifting for the global economy. I believe Chinese trade deficits are actually a good thing for the global economy.

To recap. The dollar is a bit higher today, as the data out of Europe and Asia continue to disappoint. The Bank of England keeps rates unchanged, while the RBNZ cut rates by 50 basis points. And China reportedly ran a trade deficit during the past month, as imports increased dramatically compared to Chinese exports.

Currencies today 3/10/11. American Style: A$ $1.00, kiwi .7357, C$ 1.0305, euro 1.3837, sterling 1.6156, Swiss $1.0726, . European Style: rand 6.8767, krone 5.6183, SEK 6.3642, forint 197.32, zloty 2.88, koruna 17.5838, RUB 28.5036, Yen 82.93, sing 1.2711, HKD 7.79, INR 45.185, China 6.5735, pesos 11.95, BRL 1.6587, dollar index 77.013, Oil $103.33, 10-year 3.45%, Silver $ 35.3275, and Gold.. $1,420.45


That's it for today. Thanks again to everyone for their kind words of support to me and my family. It has been a pretty tough week, and it feels good to get back to work! Both Ty and Chuck are off the desk today, so I will have to get this out the door and jump on the phones which have been ringing steadily with investor interest in our latest MarketSafe CD. I hope all of you have a Terrific Thursday!!

Chris Gaffney, CFA
Vice President
EverBank World Markets