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June 24, 1994
Though ARM rates have drifted higher, long term mortgages are holding in the mid-eights for the fourth week in a row.
In a new sign of a decelerating economy, Durable Goods Orders rose only .9% in May, and most of the gain came from a thoroughly temporary spike in military orders.
The interest rate trend for most of the Summer will be set next Friday, July 1, when the next set of job statistics will be released. Non-Farm Payrolls could surprise either way, but new filings for unemployment insurance are holding high -- grim for the jobless, but good for rates.
Dollar worries dominated financial markets all over the world this week.
"Dollar Crisis!" "Dollar in Postwar Low Versus Yen!" "Fed to Intervene; Forced to Raise Rates!" "Weak Dollar Threatens Inflation!" "Bonds Battered By Balky Buck!" "Stocks Sour on Shaky Sawnote!"
One more exclamation point, and I might actually begin to believe the hysterics.
There are times when the dollar is in trouble, and the word "crisis" is appropriate. There are even times when a fall in the dollar can trigger an inflation problem. However, honest, no foolin' crises are rare. For example, the most recent major crisis was the U.S. departure from the gold standard in 1971, which was kind of a while ago.
In this alleged crisis, the dollar has lost a little ground in Europe because the Bundesbank announced its intolerance for 3% inflation (can you imagine an American Fed chairman saying something like that when the unemployment rate was 10% -- as it is in Germany?). If German rates rise, interest-bearing deutschemarks will be more attractive than dollars.
The more dramatic fall in dollar value against the yen is no cause for alarm, alarmism, or intervention. Japan is running a $150 billion dollar trade surplus against the world. If Japan won't spend yen, and I had a ken to own a yen, where would I get one? Scarcity drives up price.
Surprise shifts in currency value trigger cries for "intervention." Intervention is accomplished by central banks ("Feds") around the world buying a threatened currency to prop up its value. Central banks can temporarily calm a wild market, and can temporarily clobber speculators, but cannot make water run uphill. The volume of currency trading each day exceeds the reserves of all the central banks in the world Š combined.
Weakness in a currency can be a danger sign for the issuing economy, but it's just a symptom, not a cause. There might be a slight excess of cynicism here, but most cries of alarm in the currency markets seem to come from traders who would most benefit from panic.
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