Thursday, October 21, 2010 – my comments are in italics

Initial Jobless Claims: Survey 455 Actual 452 Prior 462 Revised 475

Initial Jobless claims appear to be locked in a range.

Eco data out of China was in focus and while GDP came in slightly ahead of print estimates (9.6%
vs. St. 9.5%) expectations were elevated following the country’s rate hike on Tuesday, leading to some
profit taking in China. Of the other key Sept. China eco figures, IP came in a little light, retail sales were
stronger and CPI was inline.
Fed Article in the FT – says Fed officials are considering a more “flexible” approach to further
QE. “Fed officials are weighing an approach that allows more discretionary meeting-by-meeting
decisions than the unconditional “shock and awe” stimulus it launched during the depths of the crisis in
2008 and 2009” – FT
Beige Book – hit late in trading on Wed - Reports from the twelve Federal Reserve Districts
suggested continued growth in national economic activity during the reporting period of mid-July
through the end of August, but with widespread signs of a deceleration compared with preceding
periods. Economic growth at a modest pace was the most common characterization of overall
conditions. Consumer spending appeared to increase on balance despite continued consumer caution.
Demand for commercial real estate remained quite weak but showed signs of stabilization in some
areas. Upward price pressures remained quite limited for most categories of final goods and services. –
Federal Reserve
The U.S. Treasury delayed its semi-annual International Economic and Exchange Rate Policies
report to Congress.
It appeared that in order to provide any basis for meaningful dialogue, a number of foreign
countries were (strongly) requesting a statement from the U.S. Treasury supporting the dollar. Secretary
Timothy Geithner made comments speaking at an event in Palo Alto, California. He indicated the U.S.
will preserve confidence in a “strong dollar” (not the strongest “strong dollar” comment ever uttered)
and that the U.S “will not engage” in currency devaluation/depreciation. – Bloomberg

7 Month daily chart of US Dollar Index (average exchange rate between six currencies)

An orderly decline is fine but we don’t want the $’s decline to become precipitous. Down 13.37% in less
than 6 months is a significant move and the latest knee-jerk bounce appears to be failing. What would
make the $’s fall become precipitous? Global investors dumping $ assets. That is, admittedly, a scary
scenario, particularly considering that sovereign wealth funds have explicitly stated that they want to
diversify out of dollar assets. It’s not all doom and gloom as the benign scenario of an orderly decline is
also the more likely one. And that is a relative positive for the US as a weaker dollar could give a boost
to domestic growth (in the near term it reduces the drag on GDP from the contribution of net exports)
and helps our multinational companies. That is probably what Geithner wants and that is why he makes
these toothless strong dollar comments.

Taking a step back, it is

important to remember that
prior to the credit crunch and
the resulting ‘flight to
quality’ of dollar assets,
treasuries, etc. the dollar
was significantly weaker
than it is right now, as
shown in the four year chart
of the dollar index to the
right.