Reply #7: daily dollar watch [View All]

[UpInArms]

http://quotes.ino.com/chart/?s=NYBOT_DXY0

Last trade 90.08 Change -0.21 (-0.23%)

Talk of 5.5% Neutral Rates Pushes Dollar Higher

http://www.dailyfx.com/index.php?option=com_content&task=view&id=4277&Itemid=39

US Dollar
With both momentum and economic fundamentals on its side, dollar bulls had the confidence to take yet another stab at its 3 month high against the euro. As we warned yesterday, surging inflation especially on the producer price level will give the Fed a good reason to pump up the need for higher interest rates, which is the primary driver of dollar strength these days. Producer prices surged 1.9% on a monthly basis and a whopping 6.9% on an annualized basis. Even though the rise in the ex food and energy component was far more tempered on a monthly basis, the annualized increase was still a respectable 2.6%. This has given the Fed even more ammo to talk up interest rates – Fed President Yellen, who is a non-voter threw out some numbers today. She said that the “neutral rate” that everyone seems to believe that the Fed is aiming for is anywhere between 3.5%-5.5%. This is the first time that the market has even considered the possibility of 5.5% rates. The 5% level that the experts have been parading around already seemed a bit far-fetched, let alone 5.5%. If 5.5% rates is a really a possibility, then it’s the market that is behind the curve and not the Fed. Either way, the trajectory for rates is higher and for as long as the market thinks that rates are going up, so will the dollar. However we continue to warn that the higher rates go, the bigger the risk to the housing market, US growth and consumer spending. Higher interest rates mean not only higher mortgage payments, but also higher credit card payments, and it is already a known fact that US consumers have a tremendous amount of credit card debt. It also doesn’t help that new rules taking effect at the end of the year will require most consumers to pay 4%, up from 2% of their outstanding balances each month. Yet of course, the markets have yet to consider this a potential risk and chosen to focus more on the short-term factors that are impacting the dollar at the moment. For the time being, the combination of higher interest rates and stronger capital flows is being very supportive of the dollar. Just today, the Treasury reported that foreign purchases of US securities hit $91.3B in August, which is the strongest inflow in 15 months. Increasing appetite for dollar denominated assets were seen across the globe with US citizens even dumping foreign securities to snap up US securities (part of this is of course probably related to the Homeland Investment Act repatriation flows).

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Currency Focus: Dollar Gains On Highest Price Increases In 15 Years

http://www.dailyfx.com/index.php?option=com_content&task=view&id=4272&Itemid=62

Moving higher on the session once again, the USDCHF pair rocketed past resistance ceilings at 1.2950 and 1.3000 before settling at its current price of 1.3020. Spurring the greenback strength on the session was a better than expected net foreign security purchases figure and further suggestions of continued tightening measures by the Federal Reserve. According to the U.S. Labor Department, prices at the producer level rose the most in 15 years, spurred on by higher energy costs, to 1.9 percent in the month of September. However, what was especially notable on the release was the climb in the core figure. Excluding the volatile food and energy component, core inflation rose 0.3 percent against an unchanged level seen last month. Raising some eyebrows, the figure suggests that inflationary levels may finally be creeping into subsequent consumer goods rather than simply attributed to higher crude prices, confirming the need for further interest rate hike considerations. Subsequently on the session, net foreign purchases rose more than the consensus $60 billion expected for the month. Soaring to $91.3 billion, Japanese and Chinese investment increased as investors saw potential in rising interest rates and growth prospects in the world’s largest economy.

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