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US Dollar Continues to Get Clobbered by Negative Fundamentals

Currencies / US Dollar Mar 16, 2008 - 04:08 PM GMT

By: Money_and_Markets

Currencies Jack Crooks writes: There appears to be no end in sight for the sliding greenback. This dollar of ours is rapidly falling to depths where no dollar has gone before. In fact, to say that it's unclear when we can expect a recovery would be a gross understatement.

I don't know about you, but most Americans still have the bulk of their savings — not to mention their walking around money — in dollar denominated assets. Whether you're on a fixed income and attempting to preserve the value of your dollars, or a FOREX trader looking for an entry point ahead of a dollar-reversal, we need to have a candid, no-holds-barred discussion about our currency.

So for now, go ahead and take your hand from over your eyes. The week is mercifully over and the thrashing has stopped. It won't get any uglier for the buck; at least not until Monday.

First, let's start by taking a hard look at the factors that sent the dollar plummeting earlier in the week ...

The Negative Economic Fundamentals Clobbering the Dollar are Homegrown

Sure, there was some better-than-expected news from Germany and other parts of Europe that greased the skids, but that is an ancillary point. This was no international job. It's the homegrown negative economic fundamentals that are relentlessly pounding the buck. There are three in particular ...

Negative Economic Fundamental #1: U.S. Retail Sales

Retail sales, a gauge of consumer health, were mostly pathetic in February — considerably worse than expectations. That's attributable to the huge hole in consumers' wallets from the additional cost of filling up the SUV at the local gas pump.

Negative Economic Fundamental #2: U.S. Consumer Prices

Consumer prices are rising ... again. Another nasty CPI report that was released yesterday showed exactly that. The price increases from January to February were tame, but the year-over-year numbers are cause for concern. I'm sure frequent trips to the grocery store have made it clear to you that price increases aren't easy to swallow.

Negative Economic Fundamental #3: U.S. Consumer Sentiment

The most recent statistics on consumer sentiment are so depressing that, well, let's not even go there on a perfectly fine weekend. Suffice it to say the numbers are sitting near 16-year lows and reflect a dismal economic outlook.

This worsening trend was entirely predictable. After all, it was only a matter of time before a burnt out housing market, rising food and energy prices, and a beleaguered stock market left American consumers in a daze.

Since the beginning of the current U.S. economic downturn, the ultimate question has become: Can the U.S. consumer hold up? Unfortunately the evidence is piling up and it's pointing to a big fat " No ."

As the U.S. economy falters, the unemployment rolls continue to grow.
As the U.S. economy falters, the unemployment rolls continue to grow.

And fewer jobs only add to consumers' frustration. Remember, last week gave us further insight into the withering state of the job market in America. The ugly numbers marked the second week in a row that U.S. payrolls declined. A resilient labor market kept John Q. Consumer afloat last year, but not anymore.

Weakening U.S. economic fundamentals have clearly bruised and battered the greenback. But it's even more painful when you realize ...

The Federal Reserve Has NO Intention Of Doing Anything to Help the Dollar

Did you hear about the Federal Reserve's latest bailout plan? If not, check out Mike's Money and Markets column from yesterday for a very good explanation of why this latest Fed effort probably won't amount to much. I'm in the same camp.

Basically, the Fed's slapdash approach offers up changes to its Term Securities Lending Facility. And it will amount to $200 billion dollars of liquidity dumped on the markets through weekly auctions. Every time the Treasury Department cranks up the printing presses, it only serves to drive the currency lower.

But even with the Federal Reserve's recent adjustments, the credit crisis may not subside anytime soon. All banks not Central seem to be tightening lending standards simply because they're worried about the availability of capital due to growing losses from their exposure to this whole mess. And for good reason; witness Bear Stearns' collapse yesterday.

It's obvious that the Fed and government officials are trying to aid credit markets and the economy, but have absolutely no intention of doing anything to help the dollar. For the sake of argument, let's assume the Feds finally prevail and restore order to the U.S. economy.

What can we expect from the dollar? After all, restoring order would just take us back to a point where money was readily available and risk-taking was fashionable. Even then traders did everything they could to avoid the dollar.

Ultimately, the big question on everyone's mind today is ...

Will the U.S. Economy Get Worse Before It Gets Better?

I've racked my brain on many occasions to put together some reasoning that could legitimize a dollar rally. Unfortunately, everything I've come up with hasn't been enough. Sure, it may have explained a short breath of life for the buck here and there, but nothing substantial just yet.

But really, what must it take for the dollar to finally get itself off the ground, brush off the dirt and climb the mountain of worry? There's got to be something, right?

The current dollar bear market started back in 2001. Perhaps stacking up pieces of the U.S. economy from its good ole days (early 2001) next to pieces of the U.S. economy from today can shed some light on the question.

Key U.S. Economic Indicators

As the chart illustrates, it's not pretty!

  • Home prices were growing at nearly a 15% year-over-year clip back in 2001. Today, they're falling at nearly a 10% pace.
  • Unemployment stands at almost 5% today. Back in 2001 it was closer to 4%.
  • Consumer prices are growing marginally faster today than they were seven years ago, but these increases likely hurt more considering the rest of the pile stacked up against the U.S. consumer.

In fact, today's regular unleaded gas price is more than double the price back in February 2001 — $3.14 versus $1.41. Ouch! And when you think about the fact that household debt as a percentage of GDP has grown to over 100%, from roughly 70% in 2001, the picture looks even uglier.

As I see it, the dollar's precipitous decline grows scarier by the day. And the worst part: Rarely do we hear that the dollar is oversold, undervalued or due for a correction.

Unfortunately, nothing seems set to change that. It becomes a game of wait-and-see; wait-and-see how long before the U.S. economy improves and when (or if) the Federal Reserve will alter their course.

Bottom line: When I study all the different elements at play across the board, I believe we are witnessing a currency under siege. Until and unless either the U.S. economic fundamentals improve or the Feds stop their unabated assault on the dollar, upward price action leading to any kind of sustained rally will probably be blocked.

Stay tuned. For as long as the dollars in our wallets are worth anything, I'll do my best to keep you on top of the situation.

Best wishes,


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