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Thursday, October 02, 2008 3:04 PM

U.S. Dollar Bulls Still Right, Here's Why

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Those bullish on the US Dollar continue to be correct. Let's take a look at the recent news, then a few charts.

Please consider Trichet Says ECB Discussed Rate Cut as Growth Slowed.

Oct. 2 (Bloomberg) -- European Central Bank President Jean- Claude Trichet said policy makers discussed cutting interest rates today after financial-market turmoil weakened economic growth, reducing the threat of inflation.
My Comment: Inflation can only be seen in the rear view mirror.
"The economic outlook is subject to increasing downside risks" mainly "stemming from ongoing financial-market tensions," Trichet told reporters in Frankfurt today after the bank left its benchmark lending rate at a seven-year high of 4.25 percent. As a result, "upside risks to price stability have diminished somewhat, but have not disappeared."
My Comment: The world may be heading into a global depression and Trichet is still worried about "upside risks".
"We had examined two options, one letting interest rates unchanged and one decreasing interest rates," Trichet said, adding that the decision today was unanimous. Policy makers discussed the "extraordinary high level" of economic uncertainty stemming from the financial-market turmoil.

Trichet noted the "good evolution" of inflation expectations. The ECB's preferred gauge of five-year inflation expectations today slumped to a three month low of 2.52 from 2.65 yesterday.
Next Several Moves By Trichet Will Be Lower

The next several moves by the ECB are down. If the US bailout boondoggle passes the house, I believe Bernanke may be done cutting. This would be extremely supportive of the US dollar, especially if asset prices continue to slump.

Boris Schlossberg Director of Currency Research, GFT Forex

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Borris Schlossberg: "Market is starting to lose confidence in Europeans ability to deal with the credit crisis. There is no formal way for the Europeans to creat a rescue package like there is in the US. And because the European economy is really falling off a cliff the Euro continues to be pressured. The Yen is likely to be the only currency to outperform the dollar for the next 6 months forward"

Hmm. Now where have we heard those statements before?

France and Germany Clash Over Bail Out Proposals

Tensions are building up in the Eurozone as France, Germany Clash Over Proposal to Bail Out Banks.

With that backdrop, let's take a look at a few charts.

US$ Index Weekly

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Euro Weekly Chart

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We are now approaching my first target of 135.

Euro Monthly Chart

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Technically, if the 135 area does not hold, and I do not think it will, the Euro is headed to 125, then 115. Fundamentally, there is every reason for the Euro to plunge to that level.

Those screaming "manipulation" a couple months back now look more than a bit silly.

Inquiring minds may wish to review the charts in Gold, Silver and the Great Unwind on August 16 2008 and Conspiracy Theory Psychology on August 28.

Dogs With Fleas

There are a couple of interesting quotes in Euro Falls to 13-Month Low Versus Dollar; ECB Debated Rate Cut. Let's take a look.
The European single currency dropped for the fourth day against the dollar as Trichet said recent data suggests "increased downside risks" to growth.

The dollar rose against 15 of the 16 most frequently traded currencies as demand for dollar funding increased amid the seizure in the money markets. The dollar also advanced after the Senate approved a $700 billion bank-rescue bill, bolstering expectations the U.S. will act faster than Europe to address the credit squeeze.

"Looking at the euro against the dollar, it's like matching one dog against another dog. Who's got the most fleas?" said Alan Ruskin, head of international currency strategy at RBS Greenwich Capital Markets in Greenwich, Connecticut.
Count Of Fleas

Europe has "more fleas than expected" vs. the United States. Sadly, that is what this whole mess boils down to. For the intermediate future, this is very dollar supportive.

Mike "Mish" Shedlock
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