US Dollar Remains Resilient In Spite Of Emergency Rate Cut Rumor And Lehman Troubles

Negative economic data keeps streaming nonstop from the US, but amazingly, it has failed to derail the strong US dollar from its ongoing uptrend. On Sunday it was news of a government bailout of Fannie (FNM) and Freddie (FRE); on Wednesday investment bank Lehman Brothers (LEH) announced a huge unexpected loss after its shares dived on Tuesday; and today, both the US trade balance and initial jobless claims data came in worse than expected.

The US trade deficit rose 5.7% to $62.2 billion, the largest shortfall in 16 months, up from $58.8 billion in June, and much of the spending was on crude oil, which rose to a record back in July, thus raising the size of the outflow. Since oil prices have retreated by a big margin, we could see a narrowing of the trade gap over the next few months. US jobless claims fell to 445,000 from the previous week’s upward revised 451,000. Many had expected claims to fall to 440,000 from the 444,000 originally reported for the previous week.

Seemingly oblivious to these news, the US dollar remains resilient and continues to hold onto its gains against other major currencies such as the Euro, Swiss franc, Australian dollar, New Zealand dollar and the Canadian dollar. Yesterday a report from the European Commission predicted that the UK, Germany and Spain will slide into recession this year on slow consumer spending and declining exports, forecasting that these European countries would experience economic contraction for six months in a row. In fact, the Eurozone economy contracted by 0.2% in the second quarter.

What could potentially hurt the greenback would be an expectation of a rate cut by the Fed.

A rumor has been making its round Thursday of an emergency rate cut from the Fed. There is also another rumor saying that the Treasury Department is asking a US investment bank to bail out Lehman. Lehman shares continue to fall Thursday in stock trading, dropping as much as 46% on reports that JPMorgan (JPM), Citigroup (C), Sanford Bernstein, and others have sharply slashed their fourth-quarter forecasts for Lehman. There is little doubt Lehman is on the verge of a collapse, and perhaps so are those investors who are long on Lehman.

Economic Calendar For Friday:

Japan industrial production 0430 GMT

Eurozone employment 0900 GMT

US retail sales, PPI 1230 GMT

US U of Mich consumer confidence 1400 GMT

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