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U.S. Dollar: Unfazed by Mixed Data

Last updated 11/17/2009 9:34 AM ET (GMT -5) 11 Comments

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Kathy Lien

Director of Currency Research, GFT

A flurry of U.S. economic data this morning has failed to have a material impact on the U.S. dollar.  The greenback strengthened throughout the European trading session and accelerated its gains after ECB President Trichet applauded Ben Bernanke's comments on the U.S. dollar.  The latest data from U.S. indicates that the weak dollar has actually helped to boost foreign purchases of U.S. assets. 

Inflationary pressures remain muted and manufacturing activity is beginning to slow. Producer prices rose 0.3 percent last month but excluding food and energy, PPI fell 0.6 percent.  Industrial production grew by 0.1 percent in October compared the 0.6 percent the previous month.  Factory output is still increasing but the pace has slowed materially.  The only positive thing is that capacity utilization, which is a piece of data that the Fed watches closely has increased.  Ultimately these reports give the Fed more reasons to keep easy monetary policy in place for as long as they can and along those lines to keep the dollar from rising rapidly so that it can help to stimulate the U.S. economy.

Foreigners Not Scared by the Weak Dollar

According to the Treasury International Capital flow report, foreigners bought $133.5B worth of dollar denominated assets in September with $40.7B of those funds invested in long term securities.  The bulk of demand came from the private sector but foreign central banks were also net buyers of U.S. dollars.  Demand appears to be concentrated in Treasury bonds and notes as short term securities incurred a net outflow.  The demand for long term over short term securities suggests that investors have grown more confident in the U.S. recovery and the financial markets.  Despite all of their criticism, China remains a net buyer because they know by selling Treasuries in size, they have more to lose because they could drive bond prices and the U.S. dollar lower, particularly if the market latches onto their flow. The U.K., Japan and Canada were the biggest buyers of U.S. dollars while hedge funds and oil exporters were net sellers. 

Back in September, The People's Daily conducted special interviews on the topic of China moving their funds from short term to long term U.S. securities .  We believe that the comments from Tang Min, deputy secretary-general of the China Development Research Foundation, and Guo Hongyu, director of the Monetary Economics Department under University of International Business and Economics are applicable to what other central banks are thinking. Here is what they had to say about China shifting from short to long term securities.

Tang: The idea of "dumping short-term U.S. treasury bills and buying long-term such bills" is incorrect. In fact, many short-term U.S. treasury bills expired, so they were naturally sold out, not "dumped." In June, China actually bought a large number of long-term U.S. treasury bills. In terms of future prospects, the possibility of the emergence of inflation in the U.S. is small over the next year, so is that of an increased interest rate by the Federal Reserve. At this point, China would have relatively lower gains if holding too many short-term treasury bills. I believe that based on the judgment of the future interest rate trend and in terms of the management of foreign exchange reserves, it is understandable if China intends to hold less short-term U.S. treasury bills and more long-term such bills.

Guo: The approach of selling short-term U.S. treasury bills and buying long-term such bills seemed to indicate China's cautious attitude towards the recovery of the world economy. This is because interest rates may only be reduced rather than raised under the circumstances of an economic downtown. Therefore, it is safer to hold long-term bills.

Looking ahead, Treasury Secretary Geithner, Fed Presidents Lacker and Pianalto are scheduled to speak later today.  This morning, Fed President Yellen said the stock market is not overvalued and that the economy has enormous slack.  She believes that the recession is over but warned that the recovery will be slow and employment growth will be weak.

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Comments (11)

Stephan Smith

November 17, 2009 at 09:51 AM ET

With the total net TIC data showing $133.5 billion for the month of September (that's $123 billion more than last month - October), the weak dollar is definitely encouraging foreigners to buy buy buy.

Hey Kathy,

You've mentioned that the main thing that will get the dollar stronger is by the FED increasing the interest rates or my taking physical action. What do you mean by physical action?

klien

November 17, 2009 at 10:04 AM ET

Coming into the foreign exchange market to buy dollars

Stephan Smith

November 17, 2009 at 10:29 AM ET

Ok...Thank you pretty lady.

FXDragon

November 17, 2009 at 11:26 AM ET

Why are hedge funds and oil exporters selling us treasuries Kathy? Do they think fed will raise rates sooner than China thinks?

Take care,

klien

November 17, 2009 at 11:29 AM ET

Perhaps they think the dollar is headed higher. The Fed has implied they won't be raising rates till mid 2010 and the current state of the economy is in line with that projection

FXDragon

November 17, 2009 at 02:52 PM ET

So why would they think dollar is headed higher if fed wont be raising rates soon? Maybe that year end closing books or paying premiums taking place? Were they net sellers in the previous months?

klien

November 18, 2009 at 09:18 AM ET

I think the market is just begging for a reason to buy dollars and that seemed to be enough

Doobp

November 17, 2009 at 11:47 AM ET

Did i see a risk adversion today?

"Since 1850, there have been some 33 recessions in the US and
only three times has the economy fallen back into recession within a
year of exiting," he says. And since WWII, a relapse has been seen only
once "and that was when the Fed intentionally engineered it," Gittler
says. He maintains that a relapse is "highly unlikely." The low global
interest rate environment is especially supportive of Asian equity
markets and "there are still grounds for overweighting Asia vs the US on
a relative value basis," Gittler says.

kathy, do you think that the dollar will start strengthening from this point onward? From what i observed, the fed seems to be comfortable with the dollar's weakness

FXDragon

November 17, 2009 at 02:57 PM ET

Whatever happened to Rubini's 2dip recession theory? They dont seem to be interviewing him as much:)

Doobp

November 18, 2009 at 06:56 AM ET

It's too depressing to talk to him.. feeding the market with his analysis will only cause self-fulfilling prophecy

Doobp

November 18, 2009 at 07:00 AM ET

anyway, market news is not there to tell the truth, right?

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About The Author

Kathy Lien began her FX trading career 10 years ago at J.P. Morgan Chase. After graduating New York University’s Leonard Stern School of Business at the age of 18, Kathy joined the bank's interbank FX trading desk and eventually moved to the cross markets proprietary trading desk. In the interbank market, her ability to create solid fundamental and technical analysis from the myriad of information on the market helped her trade forex spot and options. Her experience eventually led her to be chief strategist at Daily FX where she worked until she joined GFT in 2008.

With her knowledge of forex, as well as her experience trading other products, such as interest rate derivates, bonds, equities, and futures, Lien has built a reputation as an international currency analyst. She is frequently quoted on CNBC, Bloomberg, Fox Business and Reuters. Lien has also written for publications like Active Trader, Futures, and SFO magazine. She is the author of the newly updated Day Trading the Currency Market: Technical and Fundamental Strategies to Profit from Market Moves, and the co-author of Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game with Boris Schlossberg.

To buy Kathy’s newly updated Day Trading and Swing Trading the Currency Market: Technical and Fundamental Strategies to Profit from Market Moves, click here.