Has the US finally touched the bottom? Kohler

Dennis Gartman thinks the US dollar has reached a turning point, a ‘watershed’. Gartman is the legendary 35-year trader based in Virginia who gets up at 2am every day and writes a very readable, very opinionated, letter on the markets to clients.

In Monday’s Gartman Letter he wrote: “Not only have we reached a ‘tipping point’ in the dollar’s favour, we’ve reached a ‘tipping point’ in favour of American industry where the worst is now behind us and better circumstances lie ahead.”

The US dollar has now been rallying for two weeks, since the start of December, and has broken out of a tight nine-month downtrend against the euro.

To some extent, the greenback is leading a rally of all English-speaking currencies against the euro, although it’s mainly the US dollar (up 3.9%) and NZ dollar (3.1%), with the Australian dollar (1.6%) held back by soft commodity prices and the British pound (also 1.6%) held back by its own fiscal discomfit.

This change in forex market sentiment is as much about a sudden weakening of the euro because of problems among EU member states as it is about a ‘tipping point’ for the US dollar and economy.

The euro is being dragged down by its ‘12% Club’ – the EU members whose budget deficit is 12% of GDP. Greece is the worst at 12.7% and struggling to avoid default, while Ireland, UK, Spain, Portugal and Italy are all close to 12%. All have pledged to get it back to the 3% mandated under EU rules, but it’s not clear how they will do that.

And now this week Austria has had to nationalise its sixth largest bank, Hypo Group Alpe Adria, to prevent its bankruptcy as a result of defaulting East European loans.

France and Germany may be pulling out of recession, but Spain, Greece, Ireland and the Eastern European countries are mired in recession and burdened by a crushing EU demand for fiscal consolidation that will keep unemployment high for many years.

Dissension must increase: the governments of the 12% Club are likely, at some point, to rebel against the 3% debt/GDP requirement, which will in turn put more and more pressure on the euro.

So, while Europe struggles between the public debts of southern European nations and the private debts of Eastern Europe that are owed to central European and Scandinavian banks, market confidence about America’s prospects is growing.

This is despite the fact that most public perceptions about US debt remain very negative, highlighted by Australia’s shadow finance minister, Barnaby Joyce a week ago, and discussed here on Monday.

As Dennis Gartman wrote on Monday: “The public and the media have taken a seriously one-sided view of the dollar’s future course, believing almost unanimously that the dollar’s future is bleak and one-directional.”

Huge short positions have developed against the US dollar as a result, predominantly in favour of the euro. Gartman says these are now ill-advised because the dollar’s weakness has finally made US goods and services “uncommonly inexpensive to foreign buyers, while making foreign goods and services uncommonly expensive to American buyers”.

“However, far more importantly, the hollowing out of American business as labour has been cut and as new, productive equipment has been added, will work to the enormous benefit of American industry over the coming weeks, months and years to an extent that few understand at the moment.”

I hope he’s right. With the US government crippled by debt, a self-sustaining private sector recovery is needed if America is to recover its position in the world as a super power to balance the growing might of China.

But while it’s true that the weak dollar and low interest rates may be producing a tipping point in market sentiment about the dollar, what Dennis Gartman didn’t mention is the way the credit crunch is dragging on.

Commercial banks are still not open for lending business; to some extent they are too busy taking advantage of the steepness of the yield curve. They can borrow overnight cash from the Federal Reserve at almost nothing to fund 10-year Treasury bonds at 3.59%.

But if you think the foreign exchange market is moving far too early with this month’s US dollar rally, just remember that the world’s stockmarkets began rallying in early March – well before there were any signs of an end to the GFC, and while the public mood was still very bearish.

This article first appeared on Business Spectator.