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With no US economic data on the calendar today, the dollar weakened against every major currency except for the British pound. Trading continues to be very thin with commodities being the only products that are really moving. The tensions in the Middle East have driven oil and gold prices higher. US stocks also gave back Friday’s gains and remained contained within its weeklong trading range.

Housing, Manufacturing and Consumer Confidence

Hopefully trading will get a little bit more interesting on Tuesday, when we have the CaseShiller house price index, Chicago PMI report and consumer confidence number due for release. Weaker economic is not a given. Although house prices are expected to continue to fall as homeowners and builders offer discounts to drive sales, we could see an improvement in the Chicago PMI report and consumer confidence. Manufacturing conditions in the Philadelphia region rebounded this month, which suggests the potential for a similar improvement in Chicago. Lower gasoline prices have also helped consumer confidence recover according to the University of Michigan’s report last week - the Conference Board’s report should reflect a similar shift in sentiment.

2009 Risk: Run on the Dollar
One of the biggest risks facing the US dollar in 2009 is a run on the currency. The global slowdown has forced many central banks around the world to become internally focused. This means that any money that they have will be spent on spurring growth domestically instead of funding US spending. With next to zero yield, a deteriorating balance sheet and the risk of a weaker dollar eroding the notional value of any US investments, there are almost no reasons for foreign investors to load up on US debt. Having been burned badly by investments in Fannie and Freddie Mac, sovereign wealth funds like China have become skeptical of buying more US paper. According to an editorial in the state owned newspaper, China Daily, “China’s increased purchase of U.S. Treasury securities should not be interpreted as an endorsement of the assumption that the U.S. can borrow its way out of the current financial crisis.” If dollar demand continues to wane, we have yet another reason to expect the dollar to weaken in the first half of next years.

MAJOR REVERSAL
BRITISH POUND SELL-OFF CONTINUES
RALLY IN OIL DRIVES CAD HIGHER
AUD: GOLD PRICES REBOUND
NZD: COMMODITY CURRENCIES RECOVER
MERGER TALK IN JAPAN