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Today's commentary is by Jack Crooks, Editor of World Currency Options and President of Black Swan Capital.

Good Day Currency Traders!

Outside of my family, the two great loves of my life are currencies and baseball. And there are so many parallels between the two it's not even funny. Take the notion of a "rebuilding season."

Here in Florida, I get a chance to closely follow Major League Baseball's spring training. It's that magical time once a year when fans get an up-close sneak peek into the season ahead.

Veteran ballplayers get back in the swing of things. Rookies show what they're made of. And analysts toss out the first bold predictions of the new-fangled season.

And as a fan, the worst thing they can say about your favorite team is, "It looks like a rebuilding year for these guys."

That's a nice way of saying "Your team stinks." Sure, there are always a few surprises, and that's what keeps us tuned in all season no matter what the critics say. But it also makes you less likely to place much faith in a World Series Championship.

And when it comes to the currency markets, I'd have to say...


"This Is Going to Be a Rebuilding
Year for the Greenback"
The U.S. dollar might be our home team, but when I look at the upcoming season without bias I don't see many positive signs.

As was evident by a housing and credit collapse, the U.S. economy finished off last year on a major slide. Going into 2008, analysts were expecting a rough road for the world's largest economy. And now, after a pathetic first quarter, I think we have to face the fact that this will be a rebuilding year.

After all, you can't expect much success when your offense is slumping, your pitching staff is getting hammered and your defense is full of holes.

By my count, that's three strikes against the dollar...


Strike #1: Consumer Spending
You've heard it over and over again - consumption makes up nearly three-quarters of U.S. gross domestic product (GDP). When consumers are buying, the U.S. stands head and shoulders above all other major economies.

But today that dynamic is shifting. John Q. Consumer has dug himself quite a hole. Debt as a percentage of GDP has spiked to around 130%. Talk about being behind in the count!

Plus, tightening credit and surging inflation are barreling down on consumers like a Nolan Ryan fastball.

Week after week, we get new word of financial institutions increasing their loss estimates to cover their exposure to bad debt, and mortgage companies owning up to hundreds of millions of dollars in sub-prime-related losses.

The end result: Fewer and fewer institutions are willing to lend money while they try to shore up their balance sheets. That doesn't bode well for consumers, who need loans to spend.


Strike #2: A Weakening Employment Picture
A healthy labor market is necessary for a successful economy. That's because steady job growth bolsters consumers' spending power and positively impacts an economy's bottom line.

Without workhorses driving production, earning money and pumping it back into goods and services, the economy risks spiral out of control. It becomes a vicious cycle.

The latest numbers look bad:

Average weekly jobless claims figures are running 20,000 units higher than last year's average


The U.S. economy lost 17,000 jobs in January


And just Friday, we learned that February was an even bigger let-down, with the economy shedding 63,000 jobs!
It only gets worse when you look at workers' wages. Factoring in rising consumer prices, real average weekly earnings fell 0.5% in January and changed very little in February.


Strike #3: A Wishy-Washy Federal Reserve
When your offense is powerless and your pitching is demoralized, you can't expect your defense to seal up a victory all by itself. Nevertheless, they at least need them to stop the bleeding.

That's what the Federal Reserve is there to do - respond to incoming growth and price data and do their best to keep it all under control.

Monetary policy must be "strong up the gut," but this Federal Reserve is anything but strong. As the data comes flying at them, they remain inflexible and flat-footed.

Heck, Ben Bernanke is out there in left field creating a comedy of errors!

He's lowering rates even though banks have no desire to lend it back out to consumers. He's ignoring inflation concerns along the way. And he's showing a complete disregard for the health of the country's currency!


My Pep Talk for the Home Team ...
As a fan, it's hard to watch the U.S. strike out, and I'm certainly rooting for a comeback.

But as a currency trader, I'm not going to place any bets on the greenback until the country gets its act together.

So for goodness' sake, Ben, grit your teeth, patch up the weak spots, and do what's best for the economy in the long-run!

Don't drag us slowly from the grips of recession and then straight into the mouth of inflation. Give consumers the opportunity to save, let the job market work out the kinks, and the dollar just might conquer the global economy once again.

It's a rebuilding year for crying out loud!


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Making 'Cents' of the Headlines
Trichet Sends Up His First "Warning Signal" for the Euro

From Sean Hyman, Our Currency Director...

What's Happening:

European Central Bank (ECB) President Trichet stated for the first time in a long time that he's "concerned about the euro's appreciation."

This is the first official warning shot to traders that the ECB may be cutting rates soon. And it made traders who have been making one way bets on the "ever-increasing" euro for some time now squirm in their seats.

Traders even sold off the EUR/USD currency pair after the Non-Farm Payroll report came out. The U.S. lost 63,000 jobs. So technically, that's bad news for the dollar, and it should have sent the euro soaring. But it didn't. That means the bad job news has already done its damage to the U.S. dollar in the EUR/USD pair.

What I Say:

This is why Trichet went on to call the exchange rate moves "excessive." It's his way of saying that the exchange rate has "overshot" what it should realistically be at.

Don't get me wrong, after a good pullback...it all could continue on in the longer run. However, in the short run, the euro probably takes a pullback and gives the dollar a rest from its recent beatings.

Trichet is now starting to use words like "brutal" when he refers to the exchange rate between the euro and the United States. This is his way of trying to "talk the currency down" before he has to cut rates later on.

If he can lower the exchange rate, yet keep the interest rates where they are, he could continue to fight inflation and not crush the export sector by a high exchange rate. Will he get his wish? I doubt it.

I believe that the exchange rate will have to come down. However, I also think that he'll have to cut interest rates in the latter half of 2008.

In the meantime, the euro will have to work its way downward in the months ahead.