US Dollar: Don't Trust This Rally

09/25/2008 12:00 am EST

Focus: FOREX

Kathy Lien

Managing Director and Co-Founder BKForex LLC, BK Asset Management

It is now confirmed that the US housing and labor market is in serious trouble. New home sales broke below the 500k make-or-break mark, for the first time in 17-years. The last time we saw new home sales at these levels was during Bush Senior's Administration. Jobless claims also climbed to 493k, the highest since 2001. To add salt to the wound, durable goods orders dropped 4.5 percent last month.

However, these depression like numbers, failed to put a dent into the US dollar as investors hold their breath for the approval of Paulson's Troubled Asset Relief Program. With Congress going on recess at the end of next week, something needs to happen over the next few days. The euphoria in the markets could be short lived since the stock and currency markets have been very fickle.

Gold prices are higher and everyone is hungry for US Treasuries, driving the TED spread and the LIBOR/OIS spread near historic highs. This tells us one thing: Lending between banks has frozen, and big investors are still risk averse. Therefore, I would not trust the USD/JPY and carry trade rally.

Paulson's Plan Could Be A Lose-Lose For The US Dollar

Paulson's plan is ultimately a lose-lose situation for the US dollar. If it’s approved it would cause a destruction of the US balance sheet by increasing the nation's debt ceiling by 6.6 percent, to $11.315 trillion. If it is not approved, or if Paulson and Bernanke only get a trimmed down version of the plan, they would have to go back to the drawing board to come up with other solutions to unclog the mess. If we end up being between rescue plans, the uncertainty would weigh on the US dollar. Therefore, I still believe that the US dollar could fall another five percent over the next few months.

By Kathy Lien of GFTForex.com

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