Dollars, dollars, dollars.
Everybody wants them, everybody loves them now and European traders have been encouraged to dip back into US currency after Obama's little trip there as bets are being placed in advance that his policies will get the US economy under some semblance of control if he is elected. The dollar has gone straight up since Obama's July 23rd speech in Berlin, not so much for what he said there but because the Kennedyesqe reception he got tilted the bets by EU traders that he would be the next President (he is the 2:1 favorite), meaning his policies are the ones traders are betting on and that would mean a return to fiscal responsibility and a stronger dollar.
Dollar strength is an act of faith in our country and faith was getting to an all-time low this year but let's be wary of this bounce off the bottom as it does seem to be based more on sentiment than change of policy. As David Fry notes in this chart, we are just breaking over the rapidly declining 50 dma and are still vulnerable to a correction and a lot can happen between now and November to spook the currency markets. Without THIS administration doing SOMETHING concrete to boost the dollar, 76 may prove nothing more than a 5% Rule bounce off the 20% decline we've had in the dollar since 2006.
Tomorrow I'm worried about our Trade Balance report at 8:30, which is for June and will reflect the highest average oil bill ever ($135) just before demand fell off the table. We also get a horrifying Treasury Budget at 2pm, possible reflecting a $85Bn deficit for the month of July alone, a reminder that the reality of this government is that spending is a runaway train that has left the tracks and is now gathering speed in free fall at 32 feet per second squared!
$85Bn a month is over $1Tn a year worth of debt, that's enough to chase a few people back to gold, and even oil, which gives off more heat than the dollars we may have to burn in the winter if we keep running up debt at this pace.
While it's unlikely hyperinflation would happen here, it's not impossible as the neocons are already licking their chops over the prospect of opening additional war fronts in Iran and now Georgia, who we would have been obligated to defend if they had joined NATO, as was recently being discussed.
German was a leading industrialized nation in the 1920s and their WWI debt pushed their currency to $1Tn marks to the dollar. Yugoslavia fell into the hyperinflation trap in 1993 and Zimbabwe only just last week chopped 10 zeros off their currency as they had to print $100Bn bills that became worthless on the way to the store.
Nothing has fundamentally changed for the dollar in the past month other than international sentiment. Asia is weak, Europe is weak and there is a war now so Obama provided a spark that reminded investors that the US used to be a good place to hold some money but anyone who has started a campfire will tell you that a few sparks are nothing to get excited about, you need some kindling and some oxygen in the form of policy changes. So far, we have no policy and let's hope they don't start using our dollars for the kindling…
