Another Day of Dollar Depreciation...
Daily Pfennig

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In This Issue...

* Durable goods fall...
* Euro gains...
* British concern...
* The land down under...

And Now... Today's Pfennig!

Another day of dollar depreciation...

Good morning...and a happy Thursday...well, we're finally on the downhill side of the week and market volatility has remained with us:

Once again, we saw continued appreciation in the currencies as the news just isn't getting any better for the economy. At this point, there might as well be a flashing neon sign reading Recession Now, but the "r" word typically isn't thrown around officially until the time has past. The durable goods report is just another item on the long list pointing to that terrible "r" word.

Orders for durable goods fell 1.7% in February led by a record 13% slump in demand for machinery. Since the report was actually estimated to have risen by .7%, companies are becoming more reluctant to invest and cutting back on equipment purchases. This release was on the heels of January's 4.7% decline and feeds directly into the slower manufacturing numbers released by the Philadelphia and New York reports.

Sales of new homes fell 1.8% in February from the previous month to the lowest level in 13 years. It seems like every other report released results in record lows or multi-year lows. I know this sounds like a broken record, but the tentacles of this housing bust have such a profound effect on the economy. If people aren't buying, manufacturers aren't producing...kind of like the foot bone is connected to the leg bone type of thing.

The euro region seems to be on the other side of the fence. As I brought to you yesterday, ECB president Trichet rejected calls for an interest rate cut after German business confidence rose, insisting that fighting inflation is his top priority. Companies in German metals, electronics, and auto industries created more jobs in January to meet orders and keep up with a 3.8% jump in exports, especially to China and Russia.

The dollar traded within a cent of the record low against the euro on speculation the Fed will cut rates to revive the economy while Trichet's hawkish statements suggests the ECB is more concerned about inflation than growth. He said in meetings to EU lawmakers in Brussels that interest rates at a 6 year high will help contain inflation. The dollar posted its biggest two day decline against the euro since January 2001.

Concerns about pound depreciation, the reason we constructed the New World Energy CD which excludes the pound, may be getting a bit closer. The British central bank governor Mervyn King explained that the depreciation against the euro is an unwinding of the appreciation in 2006 and another policy maker warned of downside risks for the currency.

The fact that the British economy has seen some slowing, prospects of a rate cut after its next meeting in April have been rising. The central bank is also concerned about the size of the current account deficit and expressed a need for some adjustment, which may suggest a weakening pound may be on the horizon. As Chuck has said many times in the past, if given a choice between putting a brake on the economy or letting the currency depreciate, most governments would rather see the currency fall.

It was another big day for the Norwegian krone as it rose 2%, giving it a 4% gain so far this week. The second best performing currency, the Swiss franc, broke through the dollar parity level again and is up 3% for the week. With the dollar weakness, you can expect gold and silver to rebound, both rising 4.25% and 8% respectively since Monday.

As I came in this morning, the currencies for the most part have traded off a bit from yesterday. The euro is down about .25% so far this morning, remaining just above the 1.58 handle, and I think is just a resting point as some are taking profits off the table after its biggest two day rise in 7 years. It looks like things were pretty quiet in overnight trading, so let's see what today brings.

Before I let you go, I saw a couple of stories about the land down under. It looks like Australian central bank governor Stevens has some optimistic views on his economy. He said Australian banks are weathering the storm caused by the slump in global credit markets, remain profitable, and have sound capital reserves. It sounds as though he may be preparing the markets for another rate hike at some point if inflation running at the fastest pace since 1991 doesn't cool. The RBA is scheduled to discuss rates at their next meeting on 4/1 but are expected to keep them at 7.25%.

Currencies today: A$ .9225, kiwi .8053, C$ .9807, euro 1.5803, sterling 2.0181, Swiss 1.0071, ISK 74.71, rand 8.0152, krone 5.0723, SEK 5.9461, forint 162.20, zloty 2.2325, koruna 16.0691, yen 99.45, baht 31.38, sing 1.3794, HKD 7.7794, INR 40.0950, China 7.0107, pesos 10.6955, BRL 1.7307, dollar index 71.4620, Oil $107.02, Silver $18.2250, and Gold... $948.53

That's it for today......we get the final revisions for 4th quarter GDP, personal consumption, and core PCE which are all expected to remain the same as previous estimates...but you never know. It's hard to believe that the first quarter of 2008 is almost over, where does the time go. I need to grab something to eat and find some caffeine before the phones turn until tomorrow, have a Tremendous Thursday.

Mike Meyer
Assistant Vice President
EverBank World Markets

Posted 03-27-2008 11:49 AM by Chuck Butler