NFP Data Hits the Weak Dollar Hard

The Non Farm Payrolls (NFP) Data Hits the already weak Dollar hard as 2008 gets under way with a bang.

On Friday, January 4th, 2008 the US Commerce Department released the Non Farm Payroll (NFP) report and the AP reported afterwards that “The unemployment number jumped from 4.7 percent in November to 5 percent in December, the highest since November 2005 after the Gulf Coast hurricanes dealt the country a mighty blow. Payrolls – both private and government – grew by just 18,000 last month, the worst showing since August 2003, when the economy suffered job losses as it struggled to recover from the 2001 recession.”

The stock market responded even before the opening as the futures market index sold off immediately after the NFP report. By the end of a rough trading day the DJIA lost another 256.54 points only to be outdone by the NASDAQ in percentage terms. The NASDAQ was down 98.03 points to 2504.65, a jaw dropping, bone jarring, bull disturbing 3.77%. For the first week of the new year the Dow dropped 4.2% and NASDAQ was down by 6.4%. The Year From Hell is underway, investors.

The Federal Reserve Bank immediately came under pressure by concerned Wall Street citizens and big political donors to further reduce interest rates. Most talking heads were crying for a 50 basis point cut at the next FOMC meeting set for January 30th.

The Federal Reserve and Ben Bernanke are in an impossible position. The US economy is obviously getting hit on a lot of fronts. The crisis in housing and the subprime mortgage market seem to be infecting other parts of the economy. The poor American consumer may be about tapped out. With energy prices and food prices soaring, with credit cards maxed out, with home prices still falling with probably a long way to go, and with jobs being cut, many consumers must spend a lot of their non working time trying to figure out how to make ends meet rather than heading for the malls.

Add to that mix of bad news a falling stock market and the Fed has good reason to reduce rates in an effort to prop up a failing economy. Or do they?

A reduction in rates of 0.50 basis points will probably knock the stuffing out of an already weak dollar. In fact, with futures already indicating about an 85% chance of a 0.50 basis point cut at the next FOMC meeting the Dollar selling will likely get started right now. Actually, a good dose of Dollar selling started immediately after the NFP announcement on Friday.  For example, within seconds of the NFP announcement  the Japanese Yen gained more than 100 pips before you could blink an eye.

So what will the brave and often foolish old boys at the Fed do? I expect that they will opp for lower rates in an effort to prop up the economy and the stock market. After all the old boys at the Fed have close ties with the old boys who control establishment buddy buddy Wall Street. However, there is the risk that the dollar will soon go into free fall, which will further elevate gold, oil, vital commodity prices, and all imported goods, and add to inflationary pressures.

There is no easy way out for the Fed just as there is no easy way out for the beleaguered Dollar. After many years of mismanagement the US will have to pay up for its policies. When you manage your currency as if you are a Banana Republic you must expect at some time to be treated as a Banana Republic in foreign exchange markets. That time is rapidly approaching for the US Dollar.

If you're new here, you may want to subscribe to my RSS feed. Thanks for visiting!