The rebound in the foreign exchange market on Wednesday was short lived as another wave of risk aversion hits currencies. US economic data was very weak with jobless claims rising to the highest level since 1982 and housing starts dropping 15.5 percent to the worst level ever. Starting with the labor market, continuing claims, which measure the number of people remaining on unemployment rolls rose to 4.607 million. So far we have seen 12 consecutive months of negative non-farm payrolls and as long as claims remain above 500k, we will continue to see net job losses in the US economy. If a bellwether like Microsoft can announce that they are planning to cut 5000 workers, more companies will follow suit especially smaller ones who may not have rainy day funds to weather the storm. In past recessions job cuts have lasted for a minimum of 15 months which means that non-farm payrolls may not turn positive until the second half of the year.

The housing market is crippled by the falling consumer wealth and tight credit markets. Even potential homeowners who actually have the money to by are having a very difficult time obtaining financing. Good credit ratings don’t really matter any more. with so much inventory still on the market, housing starts and building permits should continue to drop.

The labor and housing market data highlight the seismic challenges that the US economy faces but the dollar continues to benefit from safe haven flows. In times of economic uncertainty, investors flock into the lowest yielding currencies.

Geithner Turns Up the Heat on China

In his confirmation hearing with the Senate Finance Committee, Treasury Secretary Nominee Tim Geithner said that a “strong dollar is in America’s National Interest.” As potential Treasury Secretary, we expected Geithner to adopt the stance of his predecessors, which is to pay lip service to the strong dollar policy. Over the past few years, the consequences of the US government’s fiscal and monetary actions is a weak and not strong dollar. For any country that is slowing or in recession, a weaker currency is more helpful than a strong one.

So there is no real meat to Geithner’s comments especially as the Federal Reserve embarks on their “credit easing” policies. It would also have been a mistake for Geithner to say anything otherwise about the dollar at his hearing because rocking the boat could risk his confirmation.

More significantly, he also suggested that the Obama Administration will may be saying goodbye to the buddy versus bully approach to China. He believes that Obama will “aggressively try to change Yuan policy” and that China will no longer get a free pass in trade violations. Geithner went one step further by saying that Obama believes that China is “manipulating” its currency and therefore the new President wants currency realignment. This represents a dramatic departure from the Bush Administration’s strategy. Former President Bush and former Treasury Secretary Paulson have allowed China to appreciate the Yuan on their own terms and to a large degree it has worked because over the past 3 years, the Yuan has risen more than 15 percent. It is still undervalued by at least 10 percent but China is not one to buckle down to political pressure even if it comes from Obama. This is a bad time to ask for Yuan stregnth because growth in China has slowed materially. If the US brands China as an official currency manipulator it will be interesting to see what type of backlash or economic war comes out of it.

Kathy Lien is Director of Currency Research at GFT, and runs KathyLien.com.