It Could be A Good Week for the Dollar

May 19, 2008

The US dollar has started the week strong thanks to the better than expected leading indicators report. For the second month in a row, leading indicators increased, suggesting that the US economy may not be in a recession. Although the numbers are definitely encouraging, I believe that recession or no recession is just a matter of semantics.

The bigger question is whether or not the current downturn will be shallow.

With the Fed signaling an intention to pause when they meet to discuss monetary policy in June, the market is looking for any data that would confirm that stability is the new course for the US economy. The LEI numbers are certainly encouraging even though we are slightly suspicious of whether the improvements are more than just a rebound. Building permits, stock prices and the interest rate spread were the biggest gainers, but the two former components saw a big decline the prior month.

The US economy is still at risk for slower growth, but that should not draw away from the fact that the market perceives the news as dollar bullish. This strength should continue into tomorrow’s producer price report. Not only have food and oil prices increased last month, but the import price report also surprised to the upside.

The dollar should remain firm in the beginning week as there is nothing to threaten its rise until Friday when we are expecting the existing home sales report. Traders still need to be cautious of what they buy because even though I believe that the dollar should strengthen against the Euro this week it could continue to sell off against the Canadian dollar (I am looking for both the German ZEW and IFO survey to fall short of expectations and Canadian CPI to beat expectations).

The reason why

Posted in Bloomberg, Fed Rate Cut Expectations, Food prices, euro, Canadian Dollar, Federal Reserve, British Pound, US Dollar