Europe’s Leaders Force Dollar Rally …U.S. Traders Take the Day Off

By Chuck Butler Well, the Junk Yard Dog finally got a hold of the euro yesterday.

Even though the U.S. Banks (i.e. the majority of currency desks), were observing Veteran’s Day here in the U.S., all the major currencies still fell drastically vs. the dollar. And the euro was leading that march lower!

The Junk Yard Dog I’m talking about is Jean-Claude Juncker, chairman of the Eurogroup and Prime Minister of Luxembourg. Apparently, he stopped the euro’s budding rise earlier this month when he said: “the euro’s recent rise was undesirable.”

He also buried the euro, and all the rest of the majors except yen, when he said he “didn’t see any reason there couldn’t be more rate cuts by the ECB.” (The ECB is of course the European Central Bank.)

These two comments tore through any gains the currencies had mounted vs. the dollar in recent weeks, like a Junk Yard Dog tears though some raw meat! He shoved a knife in the euro’s heart.

And so it was to be. We had a massive dollar rally on Veteran’s Day.

This Reeks of an Intervention to Me

Remember, this guy isn’t even the President of a Central Bank in the Eurozone.

So if he can bury the euro like that, you have to sit back and wonder what’s going on here. Was it simply a case of watching the euro rally in recent weeks, and even getting within spittin’ distance of 1.31 last week? Did the Euro guys simply need to stem the rise?

Well, if that’s the case, their plan worked! And like Col. John “Hannibal” Smith used to say, “I love it when a plan comes together.”

And it just so happens that the Bank of England (BOE) head Gov. Mervyn King added to problems for the majors. He announced the BOE policymakers are “prepared to cut interest rates again to prevent a recession pushing inflation below its target.”

This all happened on the day when most U.S. currency desks were empty yesterday. Hmmm…sure seems to me as though this was a “planned” jawbone intervention to support the dollar.

New Bank of America Report Agrees With Me!

Looks like the good folks over at Bank of America, have been reading my articles!

I say that because the Bank of America (BOA) issued a report saying, “U.S. dollar gains are increasingly at risk toward year-end as declining credit market rates switch investors’ focus to the slowing economy.”

Wow! They basically just reworded what I’ve been saying almost daily for a couple of months now. The report goes on to say that…

“A weak economy and declining stock prices are not a solid foundation for any currency over time. Persistent strength in the dollar is more related to the unwinding of long positions in the euro and pound and not a sign of optimism about U.S. economic prospects.”

It’s nice to see someone other than me, keeping my eye on the ball here.

“Rescue Plan” Is This NEW “Bailout Plan”

Meanwhile, there’s another “bailout” plan in the works. But the media now calls them “rescue plans.” The latest “rescue plan” is for the automakers. The Speaker of the House wants the bailout package now!

Unfortunately, for her and automakers, it doesn’t look like this bailout package will happen. This “lame duck” Congress won’t be able to pass it. The “new guys” don’t come into office until January 6th.

I still have hope that maybe, just maybe, this bailout era will end eventually. I’m hoping people will wake up and disregard the notion that every freaking business “deserves” a government-sponsored bailout with their tax dollars. But somehow, I doubt that will happen.

The Ultimate Crisis Currency to Own As Bailouts Continue

As I said above, most of the major currencies got whacked yesterday. But not the Japanese yen! When things get really dark in the U.S., that’s when the dollar and Japanese yen shine.

To me, that is still a strange phenomenon. The dollar can be strong vs. almost every currency on the face of the earth, but losing ground to the yen. You would think that the other currencies would get some love just based on the dollar / yen cross!

Recall, I’ve explained the currency pairs and crosses before, and how one major pair (like dollar / yen) usually carries over to the other currencies.

But the dollar and yen were the two major currencies used to fund the carry trade, so they are getting bought at the same time. This is causing all kinds of ripples in the currency karma.

Why Own the Yen Right Now!

The Bank of Japan (BOJ) has a tendency for setting the country’s interest rates low, so the yen has been a popular currency with investors during the past decade to use for carry trades.

Fortunately for the yen, the carry trade is considered a “risk trade.” And in today’s market environment, with the financial meltdown, “risk trades” are being unwound. In other words, investors are taking them off their books.

This simply means that investors are covering all those short yen positions, so traders have to buy back the yen. This unwinding of carry trades has already fueled a 13% rise in yen VS the dollar.

But we’re not done yet. There’s plenty of good news left for the yen. The carry trade is nowhere near finished unwinding. In addition, there are a number of “risk events” that have happened in 2008, and many believe there will be a number more as the U.S. economy is dragged through the mud of a protracted recession.

The prospects for further gains in the yen VS dollars look good. But please keep in mind that the BOJ has been known to intervene. At any time, the BOJ can use their vast treasure chest of reserves, to stem the yen’s rise.

However, the force of the carry trade unwinding could be too large a force to control. Either way, the Japanese yen is still the best currency to own throughout the duration of this crisis.

That’s it for Today!

I hope your Wednesday is Wonderful!

Chuck

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