Dollar Drama Takes Nasty Turn

Durable goods orders are out Wednesday and expected to decline by 2.5% after a 5.9% gain in July, while construction spending, scheduled for release Friday, is expected to drop 0.1% in August after a sharper 0.4% decline in July.

Thursday brings inflation data, with personal income and spending data for August. Analysts say both are expected to rise a substantial 0.4% in the month, while the core personal consumption expenditures are expected to rise a modest 0.2% in August. Most analysts believe the weakness of August's decline in jobs will not show through in consumption data for some time.

The more immediate reflections of inflation risk will be manifest in the currency markets and the price of gold.

The dollar may bounce in the near term, at least vs. the euro, says Ashraf Laidi, chief foreign exchange analyst at CMC Markets. He notes that the European Central Bank's previous commitment to raising rates is coming into question, meaning Europe may slash interest rates with the Fed. He notes that some recent European economic data also reflect a slowdown there resulting from August's credit crunch, which was not confined to U.S. banks by any stretch.

Lower rates in Europe would make the dollar more attractive again from a yield perspective, and Laidi believes weak economic data in the U.S. could once again resume the flight-to-quality trade in short-term U.S. Treasury bonds. Such panic trades, while not good for the long term, can provide a quick bounce for the dollar.

Indeed, he believes the long term is looking shaky for the greenback.

Saudi Arabia's decision not to cut interest rates along with the Federal Reserve is "very loud," says Laidi. "It's caused people to raise the question of how sustainable it is for other nations to peg their currencies to a declining dollar," he says. "There is question now as to their willingness to bear the inflation risk of the dollar."

Saudi Arabian officials said they will keep their peg, but it is customary for countries with a peg to move rates in concert with the policy of the country they're pegged to. But with oil at over $80 per barrel, Saudi inflation at 3.8% year over year and the dollar falling, keeping rates high seems reasonable.

Like the rest of the world, they're just contending with too much liquidity and slowing U.S. economic growth -- a stretched definition of global stability.

Other lowlights due next week include the latest dismal earnings reports from homebuilders Lennar(LEN Quote) and KBHome(KBH Quote).

1 What would best describe your stance heading into the coming week of trading? Bullish Bearish Neutral 2 Which of these sectors do you think is set to move up in the coming week? --Choose One--Aerospace and DefenseAirlinesAutomobilesBeverages and Food ProductsBiotechnologyCommercial BanksComputers and PeripheralsConsumer NondurablesEnergy Equipment & ServicesHMOs and HospitalsHomebuildingInsuranceIntegrated OilInternet, Software ServicesInvestment Bankers and BrokersMediaMultiline RetailPharmaceuticalsPrecious MetalsSemis, Semi EquipmentTelecom EquipmentTobacco and AlcoholWireless CommunicationsUtilities 3 Which of these sectors do you think is set to move down in the coming week? --Choose One--Aerospace and DefenseAirlinesAutomobilesBeverages and Food ProductsBiotechnologyCommercial BanksComputers and PeripheralsConsumer NondurablesEnergy Equipment & ServicesHMOs and HospitalsHomebuildingInsuranceIntegrated OilInternet, Software ServicesInvestment Bankers and BrokersMediaMultiline RetailPharmaceuticalsPrecious MetalsSemis, Semi EquipmentTelecom EquipmentTobacco and AlcoholWireless CommunicationsUtilities View the results without voting