Pressure on the Dollar Escalates Ahead of Trade Balance (page 1 of 2)

US Dollar

The market has been fairly quiet today with the US dollar continuing to slowly give back some of the strong gains that it incurred last week. There are a lot of reasons why the dollar is under pressure today, all of which have ramifications that should extend far longer than just having a one day impact on the value of the US dollar.

The most worrisome developments is official news out of Iran that they have successfully "joined the club of nuclear countries" by enriching uranium for the first time. This is in direct defiance of the UN Security Council's calls last month for the country to suspend nuclear research within 30 days and that is sure to lay pressure on the West to respond to Iran's latest push to test their comfort levels. Rumors have already surfaced yesterday that the US may use nuclear weapons on Iran.

The government has denied these reports, but geopolitical uncertainty is never good for a country's currency. In the meantime, both oil and gold prices are skyrocketing in response to the growing geopolitical risks. In fact, oil prices are but a whisker away from its all time November 2005 highs of $69.45. If you recall, when we were trading above $69 a barrel, gasoline prices in most states were above $3 a gallon.

This time should be no different and we expect higher energy prices to not only be sore point for the dollar right now, but also be a big damper on consumer spending and growth in the second half of the year. Tomorrow we are expecting the trade balance for the month February, which is the first major release of the week. The forecasts are calling for a mild contraction, but we know that the trade picture isn't getting any better.

China reported today a trade surplus that doubled expectations. Soaring exports and slower growth in imports pushed the country's surplus to the second highest monthly reading ever. The US is China's largest trading partner with China closing in on Canada as the US' largest trading partner. Therefore it is perfectly feasible that we could see the trade deficit widen instead of narrow.

If so, expect some dollar bulls to begin to head for the exit and more to join them if retail sales also disappoints on Thursday. Of course on the flip side, good numbers would validate the recent calls by some major investment banks for 5.5 percent or 6 percent rates and help the dollar recover some of the past two days of losses.

Euro

Despite weaker German economic data, the Euro managed to rebound for the second consecutive day. The ZEW survey of analyst sentiment fell from 63.4 to 62.7, against the market's forecast for a rise to 65.5. As we mentioned yesterday, the ZEW survey was probably taken before the European Central Bank's latest comments. According to the ZEW institute, analysts were worried about the impact of high oil prices and the risk for a general slowdown of the world economy.

For the most part, they think that Germany's growth may have peaked given the lack of stimulus to fuel a further recovery. We think that this bearish sentiment certainly has to do with the fact that the Euro was skyrocketing at the time of the survey and the ECB looked as if they were going to increase rates in both May and June, both of which would have reduced the stimulus in the economy.

Meanwhile we finally have some results from the Italian elections. Romano Prodi has been declared the official winner of the parliamentary elections after an extremely close vote.