Dollar quandary

Against the euro, the value of the dollar has pivoted around $1.40 Thursday morning with two views battling for supremacy in driving the next five cents in either direction. Healthier signs emanating from the labor market in recent days have spurred recovery bulls to relax the need to hold dollars. That accentuates the burden on the dollar as investors are left to face the prospect of repairing a spiraling budget deficit. Yet hampering the notion that the dollar is soon to become a relic is a rise in yields suggesting that government and central bank policy is failing to hit a home run. Those thinking further ahead can see that 4%-plus bond yields will quickly snuffle any signs of economic recovery and create the need for additional stimulus and of course a need to increase the number of dollars.

Earlier in the day U.S. retail sales met expectations with growth of 0.5% on the month for May. April’s tax break helped boost disposable incomes and allowed some shoppers with a nose for a bargain to go car hunting ahead of Chrysler and GM’s announced bankruptcy. We hear few analysts raving about the 9.9 million annualized car and light truck reading. There seems to be an understanding that there will not be a sustainable return to a double-digit amount of vehicles sold under current conditions especially when the consumer is faced with rising gasoline and unemployment claims.

Retail sales improvements outside of autos, gasoline (which rise on account of accelerating prices rather than volumes) and building materials were scant and will hardly lead economists to change their growth trajectories for the U.S. economy anytime soon. Expectations for 2009 personal spending remain at a drop of 0.7% for the year as a whole, while recent anecdotal evidence confirms that outside of food and gas spending, shoppers are reticent to spend on many things discretionary these days.

More positive news came from a smaller than expected increase in jobless claims. Through last weekend 24,000 fewer claims were filed over the previous week as 601,000 people signed up for benefits. That still created a nineteenth consecutive rise in the total benefit claim to a record 6.82 million claimants.

Wednesday’s beige book from the 12 regional Fed offices made for desperate reading. The overall picture was relatively gloomy and not what one would expect to see at this stage of a normal cycle. It would appear that investors seem happy to throw caution to the wind, while the street level view from those who matter paints a more cautious tale.

New York University economist, Nouriel Roubini whose dire economic predictions correctly preceded the financial meltdown sounded distinctly like Pimco’s own Bill Gross when he addressed an audience in Athens earlier. While the subject was the need for an alternative currency to the dollar, his remark that this “won’t happen overnight” reflected Mr. Gross’s comments about the potential for America’s loss of its sovereign AAA-rating. Like goldfish, most forex traders have far-shorter attention spans when deciding what to buy or sell next. While the rise of a dollar alternative as a suggestion from countries worried over their dollar-investments by a ballooning budget deficit is a factor, we haven’t yet heard from a single global mint about plans for any new engravings.

Improving economic data out of China and Australia during the overnight session boosted the yen to ¥98.14 and the Australian dollar. Urban fixed asset investment in the year through May surged by 32.9% as the weight of the government’s $585 billion fiscal stimulus kicked in and helped offset a decline in exports. The government reported stronger investment in roads, factories and properties. Such confidence boosted commodity prices and enhanced the emphasis of the Australian jobs report.

Australia’s workforce traded part-time for full-time workers resulting in 1,700 jobs lost during May and confounding the prediction of 30,000 losses. As a result demand for the local dollar has heated up and lifted the Aussie to 81.68 U.S. cents.

The surge in the price of crude oil, which was lost yesterday on the Canadian dollar after the nation’s unexpected trade deficit, is today achieving better things for the loonie, which stands higher at 90.78 U.S. cents this morning. However, dealers have their ears pricked wondering what nuggets of wisdom Bank of Canada governor, Mark Carney might drop later this afternoon. Of concern is how he might address the recent rise in the Canadian dollar. In recent minutes out of the Bank of Canada’s last meeting was an express concern that the rise might “fully offset’ recent improvements in economic conditions. Is the Bank likely to intervene in an effort to nurture those signs or will it just jawbone? The outcome will resonate with the goldfish!