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.