The dollar is challenging its highest level in eight weeks after the President delivered a difficult choice for lawmakers: Pass this bill or incur the wrath of an increasingly irritable middle-class America tired of watching the Washington circus put the economy at risk on account of personal self-interest. The bill was full of tax cuts that Republicans typically crave and Obama’s pitch was pretty sweet as he told a packed house that the cost would come from future savings. Passage of the bill is far from assured as lawmakers size-up the risks to their career by taking on the President. Such a battle might result in a pyrrhic victory given the damage they stand to inflict on the economy and the outrage they stir-up across the electorate.
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U.S. Dollar – President Obama chose his words carefully calling the $447 billion stimulus package, “the right thing to do now.” That’s pretty hard to deny and a fiscal observation that Fed Chief Bernanke made at the Jackson Hole conference last month, calling on Washington to share the burden of the yoke put on the Fed’s limited shoulders. The world heard Obama’s rhetoric loud and clear as he demanded of Congress, “Are we up to the challenge?” The nation now awaits the response and as such the risks emanating from the period of purgatory have just begun. With exogenous red-lights flashing brightly in the Eurozone, demand for the dollar is building. The dollar index jumped to 75.68 and within an ace of its July 12 high. Helping the dollar gain strength is the lack of emphasis on an additional expansion of the Federal Reserve’s balance sheet. Additional quantitative easing is increasingly expected to result in an extension of the duration of what the Fed holds in an effort to force the yield curve lower. We heard last night from the President that he had ideas on how to deliver the benefits of low interest rates to those who hadn’t been able to take advantage of record low mortgage rates. Liberating disposable personal income is a big deal in an economy strapped by too much debt and is rather welcome at a time when the central bank is running out of ways of telling us that you can take a horse to water, but you can’t make it drink.
Euro –The dollar is benefitting at the expense of the euro where the sovereign debt saga continues to roll faster downhill. According to reports earlier in the week the German Finance Minister told a meeting of lawmakers that Greek progress towards reducing its deficit was falling short of the mark. This situation across the Eurozone is becoming increasingly painful and carries a sense of watching a psychological drama a second-time around in which you see the actor repeat the same mistakes in the full knowledge of the demon lurking around the corner. The single currency has accordingly left the comfort of its long-held $1.40-$1.45 trading range and today slumped to $1.3789 and easily taking out the July 12 low. In other words, while the dollar index hasn’t yet breached that day’s peak, the euro has lost the plot.
Japanese yen – The dollar’s solid advance also has it beating back the yen, where currency pressure on exporters is beginning to buckle. The dollar accelerated in early New York trading as stock index futures responded to losses across European bourses. The dollar rose to ¥77.82 and is increasingly seen as the best safe haven alternative as risks from the further quantitative easing are seen as limited to shaking down the Fed’s balance sheet and after the Swiss capped the franc’s upside by implementing a peg.
British pound – Sterling still has some way to go before taking out its July low versus the dollar, yet remains below $1.6000 for a fourth day. On Thursday the Bank of England neglected to make any changes to monetary policy, which seemed to provide a sense of relief that created undue optimism for the pound, or at least a short-covering rally. The pound rose on Thursday to a session high at $1.6050 and as we head in to the weekend the unit slumped to a session low at $1.5901.
Aussie dollar – The Aussie dollar’s performance pretty well sums up the ongoing risks to global growth on Friday as it heads back towards the lowest point of the week. It was the rebound in equity prices earlier that drove the unit to as high as $1.0650 U.S. cents along with a cleverly worded speech from central bank Governor Stevens who said that it was nice that he had flexibility in monetary policy when investor confidence swooned repeatedly. His remarks essentially said that the bank doesn’t have to raise rates, but he sounded some way off being persuaded that policy needs to be eased. This week’s employment report also disappointed investors with the net number of jobs falling for a second month as the rate of unemployment rose to 5.3%. The Aussie hit free-fall mode on Friday as risk appetite soured sending the unit down to $1.0509.
Canadian dollar – A surprise jump in the headline unemployment rate sent the Canadian unit back towards its weekly low. Expectations of a net gain in employment were dashed by a slide in part-time employment where 31,200 workers lost their positions. Full-time employment gained in-line with expectations. The headline rate ticked up to 7.3% while the participation rate slipped by a smidgeon to 66.7%. The government said most jobs were lost in the construction sector (-24,000) while transportation and warehousing shed 14,000 positions. The loss of 12,000 positions across the natural resource sector means that the sector has fewer employees than one year ago. The loonie eased to buy $1.0050 U.S. at the session low.
Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC
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