Pressure Should Mount on the US Dollar

In the US, the big discussion is will the Fed cut rates. Overseas, investors know what their central banks are doing. Raising rates. Australia's central bank raised its benchmark interest rate a quarter point to the highest in almost 11 years. Britain’s Central Bank raised interest rates last month and is signaling it is going to raise rates again. And not to be outdone, Europe’s Central Bank – which already has rates at a six-year-high – says it may raise them again as soon as next month. In Canada, economists are looking for the Bank of Canada to raise the target overnight bank rate by 25 basis points to 4.75 per cent on Sept. 5 or possibly in October, and analysts are also calling for the Bank of Japan to raise rates in the next few months.

This tends to make me believe that as much as the US would like to cut rates, it can’t. What else is supporting the US dollar? After all, now China is threatening the “nuclear option” of US dollar sales:

Two officials at leading Communist Party bodies have given interviews in recent days warning - for the first time - that Beijing may use its $1.33 trillion of foreign reserves as a political weapon to counter pressure from the US Congress.

Will the Chinese do it? I don’t know. But it doesn’t reinforce my faith in the greenback.

Meanwhile, U.S. Mortgage Applications Rose 8.1 Percent Last Week, Most Since January. This is leading some to call a bottom in housing, and if you’re looking for a reason why US futures are up this morning, I can’t think of a better reason. Still, with the volatility we’ve seen lately, there’s no guarantee that stocks will end up today.

My colleague Mike Larson just sent me a note about the rise in mortgage applications: "mortgage apps have been rising lately due to falling rates. BUT it hasn’t been correlating with a pickup in home orders/sales, near as I can tell. Why? Fewer APPROVALS. The MBA data doesn’t capture how many applicants are given loans, only how many apply. When lenders tighten standards (or go out of the business, as many are doing now), it will generally lead to more fallout – fewer applicants actually being able to buy."

Check out my new gold and energy blog at MoneyAndMarkets.com