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US Dollar Up Despite Dismal Jobless Claims, Wholesale Sales - What Will Friday's G7 Meeting Bring?

Thursday, 09 October 2008 22:26:58 GMT  |  Terri Belkas, Currency Strategist

The US dollar ended the day on a stronger note as an end-of-day selloff in the US stock markets triggered yet another round of flight-to-safety.

More specifically, the DJIA ended the day down 7.33 percent while the S&P 500 finished down 7.62 percent, while the CBOE’s VIX Volatility Index hit a fresh record high of 64.92. Furthermore, US economic data was far from optimistic, as the 4-week moving average of initial jobless claims (which helps to smooth out the volatility associated with the week-to-week figures) jumped to 482.5K from 474.25K, marking the highest reading since at least January 2002. Meanwhile, US wholesale inventories jumped 0.8 percent in August, as foreign and domestic demand wanes. Indeed, the ratio of inventory to sales hit 1.1, the highest since March as nearly every component showed building supply levels along with weaker sales. Overall, economic data points toward recession for the US, which could be confirmed by GDP figures for Q3 and Q4.

Will the US go the way of the UK by recapitalizing banks in exchange for shares? It looks like the idea may be gaining traction. According to Treasury Secretary Henry Paulson, the $700 billion rescue bill passed last week allows the government to do so in addition to buying troubled assets. This was the method used by Sweden back in the early 1990s when they faced their own financial crisis, in which shareholders were not compensated and only some banks were included in the plan, chosen with a microeconomic model that determined which were most likely to survive. While any sort of action by the Treasury is likely to take weeks, the announcement of such a plan could provide a boost for investor confidence. The next big question mark for the markets is this Friday’s G7 meeting in Washington. Treasury officials have said that no joint initiatives will be announced at the meeting following the coordinated rate cuts on Wednesday, but this could change depending on market conditions. Nevertheless, a lack of strong statement or plan is likely to take a toll on the markets when they open in Asia on Sunday, so the pressure is on for G7 officials to do or say something meaningful.

Check out Daily Fundamentals in its entirety for analysis and outlooks on the US dollar, euro, British pound, Japanese yen, and the commodity dollars.

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