The US dollar fell to a record low against the Euro as traders around the world grow increasingly worried about the health of Fannie Mae (NYSE: FNM [1]), Freddie Mac (NYSE: FRE [2]) and the overall US banking sector.
(Source: My Technical Analyst Jamie Saettele at DailyFX.com [3])
The collapse in the dollar today is entirely due to risk aversion and flight to safety because gold prices are also above $980 oil prices and oil prices are above $146 a barrel.
Yesterday, the rise in the VIX (to a 3 month high) [4]already indicated that the markets are nervous and are not buying into Paulson's proposal for a larger credit line and an equity investment. They know that this is not the answer to current problems in the financial markets especially since the troubles have reached beyond Fannie Mae and Freddie Mac.
When banks like Washington Mutual (NYSE: WM [5]) coming on the wires reassuring investors and depositors that they are well capitalized - it is clear that they are worried about the same lines of depositors demanding a withdrawal as IndyMac (NYSE: IMB [6]).
Everyone believes that the Fed is running out of magic bullets and this is exactly the time when the markets need a dazzling surprise from the Fed.
At the end of the day, the US government will come up with something.
Retail sales Weakest Since Feb
Unfortunately retail sales were also weak. It rose 0.1 last month compared to the market's 0.4 percent forecast. Excluding spending at gas stations, retail sales actually dropped 0.5 percent. Consumers cut back on spending for motor vehicles, food and electronics and furniture. Discretionary spending has really been hurt by higher gasoline prices and a weak labor market.
Producer Prices Grow by Fastest Pace Since 1981
Producer prices were mixed with headline figures rising more than expected but core prices falling short of expectations. This drove the annualized pace of PPI growth hit the highest level since 1981.
And thus we have the Fed's problems - strong inflationary pressures in the face of weak consumer spending and a falling stock market.
Bernanke - Please Give us a Rate Cut!
Forget about a rate hike this year and let's start talking about cutting interest rates once again. It is time for Bernanke to shift his focus back to growth and supporting the financial markets. Cutting rates will of course come with the risk of even higher oil prices, so it may unrealistic.
Instead, they will probably opt for more creative measures such as offering Fannie and Freddie access to emergency financing.
Keep an eye on Bernanke's testimony on the Economy and Monetary Policy at 10 am because MAYBE he will have some tricks in his bag.