Dollar Higher on 3 Ps - Paulson, Plosser, Price of Oil

The US dollar continues to recover Wednesday morning on the aftermath of the 3Ps - Paulson, Plosser and price of oil. Oil prices are trading on the $125 handle and since last Monday they have fallen more than 14 percent. If oil prices reach $100 a barrel, half of the Fed’s problems would be solved; Consumers would become more liberal with their spending while businesses would become more optimistic.

As for Plosser and Paulson, the Fed President called for interest rates to be increased sooner rather than later, reminding the traders that the Fed still has their eyes on a rate hike.

US Treasury Secretary Paulson was confident that Congress would approve his housing rescue plan this week and so far they are moving forward as planned, with some adjustments.

Paulson proposed increasing Fannie (FNM) and Freddie’s (FRE) credit line with the Treasury and permission to buy stock in the mortgage giants. The deal that is likely to come out of the House and Senate would permit the government to inject billions of dollars in Fannie and Freddie and to insure up to $300B in refinanced mortgages. The plan is up for vote at the House of Representatives today.

Meanwhile EUR/JPY has hit another record high and is trading within a whisker of 170. Here’s my explanation of why EUR/JPY has performed so well over the next few months.

Finally, keep an eye on the Beige Book report of business activity which will tell us how the US economy is faring.

Comments

[Coelacanth]

I read your opinion about EUR/JPY possibly going as high as 172.00 -175.00 ultimately and I have to admit I'm not as opptimistic. I did find your relationship chart between American ISM levels and EUR/JPY levels interesting though. Wonder what the fundamental reason for that is.

It's anecdotal but I'm pretty sure it will be a jaw-bone fest out of the euro-zone if we gets much past 171.00 handle. Carry trades often cloud the fundmentals on Yen crosses but I think the fundamentals are deteriorating faster out of the EU block and will be hard to ignore in the coming weeks. I'll be looking very closely at tonight's data i.e. German IFO & PMI reads and euro-zone PMI.

[anaconda]

There has been demand destruction in the United States oil market. And, while the U.S. isn't the only dog at the fire hydrant, it's still the big dog at the fire hydrant.

That said, oil is leading the Dollar and not the other way round.

The "fever" has broken in the oil market and the bulls have taken a "breather" from their earlier "Peak" oil frenzy -- there is no "Peak" oil in the "near" future -- within an economically meaningful time frame.

Without the bulls being able to scream "Peak" oil at the bar with their whiskey, the oil market is settling down.

Huge investment is being made in deepwater, ultra-deep drilling rigs for a substantial "push" on the world's continental margins -- the "new frontier" in oil exploration.

Ghawar -- the Saudi oil field and largest in the world, is an example of continental margin oil -- Ghawar is unique in that it's onshore as is most of its sister oil fields in the Middle East.

That is why Ghawar has been unique -- but now that the "rest of the continental margin" is beginning to be explored offshore and huge oil finds are being made (offshore Brazil) "Peak" claptrap is fading.

And a healthier economy is the result -- which bulsters a slightly rising Dollar. If the United States is open for business, the dollar has a slightly higher value.

Yes, the banking debacle has still not "cleared decks," but the market is "figuring in" the losses in that sector of the economy -- other sectors have reason for optimism on the steadying oil market.

So, with the oil fever broken, traders are starting to look into other avenues (market sectors) to make profit.

Good, oil should be a "work horse" and not a "show horse" in the world economy: Oil is a means to an end: economic productivity and growth, not an end in itself.

Oil Is Mastery for the real scoop on the oil supplies and the oil market.

[iThinkBig]

Agreed Anaconda. Oil will go ballistic again in 2009 if the energy policy lacks real teeth. Peak oil articles will abound and it will march out of control again, at least until we see the mass marketing of the GM Volt that is. What's that 2012?

[carey_jim]

The demand for oil in China and India went up in 2008.

Oil production is past its peak in 33 out of 48 oil producing countries.

The arctic polar cap is melting and the world is fighting over shipping rights in the resulting new open seas.

Nuclear power plants are not feasible because they are too dangerous (sic.)

Supply and demand are still the big problem:

Demand wont go away until the human race gets serious about alternative energy.

Supply will continue to diminish rapidly, barring miraculous new discoveries of oil fields.

Hoping for miracles is not good investment policy .

[gigem77]

Daytrading forex using newspaper headlines, how's that working for you? The dollar can't hold above 73. It's churning below the 200 sma before continuing the slide into the abyss. Plosser is part of the jawboning act. Everyone knows it. The fed cannot raise rates. Paulson is getting money to bail out fannie and freddie. But that's dollar negative. He's going to buy billions in subprime and Alt-A garbage with high power dollars and we are going to get inflation in spades.

After the Olympics, China will continue to revalue the yuan making the cost of oil less onerous to them. Soon the gulf states like UAE will depeg their currencies from the dollar. Paulson will monetize train loads of debt. The dollar is toast.

A temporary correction in oil lasting a few weeks won't help the dollar. Congress goes on vacation soon, that might help.

[paultaut]

The Stronger Dollar? Since when does a 3% price range indicate strenght? With the Eurozone fretting about inflation what will a stronger dollar mean to them?

Commodities will drop all over the world because of a stronger dollar! Nope, weaker commodity prices like nickel and zinc are already causing producers to close marginal mines. Why have nickel and Zinc dropped like rocks? Blame Congress which has announced that they want to eliminate these minerals in both the penny and nickel by using steel instead. Now that's real Demand Destruction.

Rumor has it that a small hedge fund had amassed 8 million brls. of crude in storage containers. They went bankrupt and when that oil hit the open markets, oil prices spiked downward. Since this occurred while our erstwhile leaders were talking about curtailing the trading of this commodity, Oil dropped. Remember the attempt to corner a particular Nat. Gas contract a few years back? Nat. Gas dropped like a rock. Big deal.

These activities while painful are artificial. They have nothing to do with supply and demand. Open the light in a dark cellar and all the cockroaches scatter simutaneously. Portfolio Managers have always reacted first and asked questions later.

Just because all of the lemmings reacted in one direction because of one earnings report from a Bank, does not make all of the other Banks healthy.

We are still in the early stages, say 3rd inning of that particular ballgame.