By DailyFX - US Dollar.This morning, President Bush announced that Hank Paulson, the Chairman and CEO of Goldman Sachs will become the new Treasury Secretary....

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Last week, the market was chattering rampantly about the possibility of Snow stepping down but the Bush
Administration downplayed the speculation. Today, the market has been proven right
and judging from the price action, traders perceive the new Treasury Secretary to be
a dollar negative. However, of all of the names that circulated around the markets,
Paulson was the best pick of the bunch. With low approval ratings, the President
really needed a heavy weight to inject some optimism back into the market. As a
well respected Wall Street leader, the hope is that Paulson will not be just the
figurehead that Snow was, with limited decision making powers in the government.
The real test will be whether Paulson can push through any meaningful changes in
policy. We are sure that he comes with the intention of bringing changes to the
table, but according to an interview with a German paper last year, his focus may be
on boosting exports rather than pressuring China to be more competitive. Paulson’s
deep ties with China could lead to a more amicable relationship. The CEO prides
himself of having visited China over 70 times in the last 16 years and his company
was very much involved in the Bank of China IPO earlier this month. Paulson has a
great track record of doubling his staff at Goldman Sachs, boosting profits last
year by 24 percent, broadening into China and shifting the company’s main focus from
underwriting to trading. The question will be whether the new Treasury Secretary
finds himself bumping heads often with the President or if he can actually becomes a
reliable adviser and decision maker. In terms of policy, although we do not expect
Paulson to admit that Administration is really following a weak dollar policy, he
may stop paying as much lip service to the nonexistent strong dollar policy.
Paulson’s pro-business, Rubin style pedigree should give the markets much comfort
over the longer term, even if on a shorter term basis, he needs a weaker dollar to
make the US economy and eventually the US dollar stronger. His nomination also
reduces the likelihood that China will be branded a currency manipulator in the
Treasury’s next report. Meanwhile US consumer confidence fell less than expected
today from 109.8 in April to 103.2 in May. More signs of slower economic growth are
emerging, pushing the probability of a June rate hike down to 50 percent. This
makes tomorrow’s minutes from the May 10 FOMC meeting even more important. If a
good number of the Fed districts report weakening conditions, especially in the
labor market, the dollar could come under pressure once again.

Euro
Today the Euro recuperated nearly all of last week’s losses thanks to broad dollar
weakness and stronger Eurozone economic data. Signs of inflation are continuing to
emerge, fueling more hawkish sentiment in the European Central Bank. M3 money
supply grew by 8.8 percent last month, compared to a downwardly 8.5 percent the
previous month. The market was forecasting for M3 growth to slow from 8.6 percent
to 8.5 percent. French unemployment figures also came in better, with the number of
unemployed people dropping by 39k, bringing the unemployment rate down from 9.5
percent to 9.3 percent. This follows yesterday’s stronger Italian confidence
figures and better Eurozone current account deficit numbers. Therefore it was not
surprising that we heard hawkish comments from ECB Council member Liebscher who
reiterated the central bank’s general view of strong vigilance towards price
pressures. Compared to the US where disappointing economic data is becoming a new
trend, over in the Eurozone, stronger data has become the norm for the time being.
Although we continue to remain cautious as the Euro rallies, it is undeniable that
we are on path for an interest rate hike next week.

British Pound
Although there was no economic data released out of the UK today, the British pound
still managed to be the day’s best performing currency pair, rising 1.3 percent
against the US dollar. The only news from the country was comments from the Chief
Economist of the Bank of England who warned that higher oil prices and competition
from China is squeezing the margins of UK manufacturers. However he also added that
domestic manufacturing is improving as exports rebound. In the meantime, the market
is looking ahead to tomorrow’s housing, confidence and CBI distributive trades
reports. With the housing market stabilizing and the economy rebounding in general,
all three pieces of economic data are predicted to be positive for the British
pound.

Japanese Yen
Divergent price action in the Japanese Yen is a behavior that we have recently
become all too familiar with. The Yen sold off against every major currency today
except for the US dollar, telling us that the dollar component is the primary driver
of USD/JPY weakness today while Yen traders in general are mildly disappointed by
last night’s economic reports. Household spending fell more than expected in the
month of April while industrial production was weaker than expected. Despite a
small uptick in the job-to-applicant ratio, the jobless rate remained unchanged at
4.1 percent. The Japanese Economics Minister attempted to talk up the yen by saying
that sharp moves are undesirable, but with USD/JPY back at 112 and EUR/JPY at 144,
we are still not in intervention territory. As for interest rates, a rate hike is
also a ways off as the government probably has no interest in fueling even further
demand for the Yen at the moment.


Kindest Regards,

Kathy Lien
Chief Strategist
Forex Capital Markets LLC
32 Old Slip, 10th Floor
New York, NY 10004
Tel (212) 897-7660
Fax (212) 897-7669
E-mail: klien@fxcm.com

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