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The greenback edged higher across the board, advancing to its highest level in over 6-months against the euro and over 2-years versus the sterling at 1.4573 and 1.8332, respectively. Propping up the dollar today was a better than expected reading in the Conference Board’s consumer confidence survey, which beat calls for an increase to 53.0 for August, instead jumping to 56.9 versus 51.9 from July. However, the present situation index fell to 63.2 from 65.8, while the expectations index improved to 52.8 versus 42.7 previously. The S&P/Case-Shiller home price index was better than expected, with the 20-city home price reading falling by a record 15.9%, albeit better than estimates for a decline to -16.2%. Meanwhile, existing home sales dipped to 515k units for July versus 530k units from June.

Also released earlier today were the minutes from the FOMC’s August meeting. The Fed expressed concern over further dampening in the economy in the coming quarters – with nearly all participants seeing continued downside risks to growth and weakness for the remainder of the year. However, several members “expressed significant concerns” about upside inflation risks, with some worrying that core inflation might fail to moderate in 2009 without tighter monetary policy.

The euro slumped to its lowest level since February to 1.4573 against the dollar amid heightened recessionary fears in the Eurozone. The single currency plunged from above the 1.47-level to its multi-month lows on the heels of a disappointing German Ifo sentiment survey, with the business climate index sinking to 94.8 in August versus 97.5 a month earlier – its third consecutive monthly decline. The current conditions index fell to 103.2 compared with a downwardly revised 105.6 in July, while the expectations index dropped to 87.0 versus 89.9. Most disheartening was the deterioration in the export climate indicator, which fell to -1.24, its worst level in over 15-years. Ifo President Sinn said that the “The German economy is encountering an increasingly more difficult situation”, highlighting the dilemma facing the ECB.

EURUSD has recovered somewhat, hovering near 1.4640 with gains encountering resistance at 1.4670, backed by 1.47 and 1.4730. Subsequent ceilings will emerge at 1.4760, followed by 1.48 and 1.4850. On the downside, support will emerge at 1.46, backed by 1.4570 and 1.4530. Additional losses will be tempered at 1.45, followed by 1.4460 and 1.4420.

The coming week will be heavy in top tier economic data, with preliminary Q2 GDP among the most closely watched. Atlanta Federal Reserve Bank President Dennis Lockhart is scheduled to speak on Wednesday.

MONDAY, AUGUST 25

The week will begin with the release of existing home sales, which for July are expected to have increased to a 4.94 mln unit annual rate, up from a 4.86 unit annual rate in the previous month.

TUESDAY, AUGUST 26

New home sales in July are not expected to experience the same improvement as existing home sales. Instead, they are expected to have dipped to a 525,000 annual unit rate, down from a 530,000 annual unit rate in the previous month. ‘Sales of newly-built homes appear to have carved out a bottom near 17-year lows in recent months and are now falling less than single-family starts,’ said Sal Guatieri of BMO Capital Markets. ‘The bad news is that prospective buyers have plenty to choose from in the equally-bloated resale market.’

The Conference Board’s measure of consumer confidence in August is expected to increase to 53.0 from 51.9 in the previous month. ‘Most notably, lower oil/gasoline prices are a plus, while the further rise in the unemployment is a minus for this labor-sensitive report,’ said economists from Credit Suisse.

On Tuesday afternoon, the Fed will release minutes from its August 4-5 policy meeting, in which members decided to keep the key interest rate unchanged at 2%. ‘Of interest is whether the usually hawkish presidents Plosser and Stern came close to dissenting (alongside Fisher) in favour of higher rates,’ Guatieri said.

WEDNESDAY, AUGUST 27

Durable goods sales are expected to increase slightly by 0.1% following a 0.8% gain in the previous month. ‘The headline number should be supported by a strike-related rise in autos and an increase in aircraft,’ Credit Suisse economists said. Boeing’s orders rose to 70 from 62.

Excluding transportation, durable goods are expected to dip by 0.3% following a 2.0% increase in the previous month. Credit Suisse economists expect ’some reversal from last month’s outsized gain, especially since the forward-looking ISM New Orders index fell to a seven-year low in July.’

THURSDAY, AUGUST 28

Preliminary GDP in the second quarter is expected to have grown by 2.7% following a 1.9% rate of growth in the first quarter. Shapiro said the revision will likely be due to ‘greater than originally-calculated improvement in the trade deficit.’

The core pce price index in the second quarter, the Fed’s preferred measure of inflation, is expected to remain at 2.1%.

Per usual on Thursday, the Labor Department is expected to release its weekly jobless claims figures. The number of individuals filing claims for unemployment in the week ending August 23 is expected to dip to 427,000 from 432,000 in the previous week. The number of individuals continuing to file claims for unemployment is expected to increase to 3.4 mln from 3.362 mln in the previous week.

Initial jobless claims have risen 109,000 between July 5 and August 2, with the large jump attributed to an indirect response related to the Emergency Unemployment Compensation (EUC) program, noted Asha Bangalore of Northern Trust. ‘We will need to watch how much of the temporary gain will be reversed in the weeks ahead,’ Bangalore said. ‘But, the fact remains that the upward trend of jobless claims underscores the significant weakness of labor market conditions.’

FRIDAY, AUGUST 29

Personal income in July is expected to have dipped by 0.1% following a 0.1% gain in the previous month. Consumption is expected to increase 0.2%, a cutback from the 0.5% gain in consumption in the previous month. ‘Sagging retail receipts and plunging auto sales in July suggest the rebate boost is fading fast,’ Guatieri said. ‘Although high food and energy prices likely kept nominal spending in the black, demand likely fell in inflation-adjusted terms,’ he added.

The core pce price index for July is expected to remain at 0.3%.

The National Association of Purchasing Managers’ (NAPM) index of manufacturing conditions in the Chicago region is expected to dip slightly to 49.8 in August, from 50.8 in the previous month.

The University of Chicago’s final estimate of consumer sentiment for August is expected to be upwardly revised to 62.0 from 61.7. ‘The improvement in sentiment has likely been due to the decline in energy prices,’ Lehman economists said. ‘However, housing weakness, turbulent financial markets and rising unemployment has continued to damp consumer moods.’

Gasoline prices fell Sunday for the 38th straight day, bringing down the nationwide average in a motorist group survey by more than 42 cents overall.

The price of regular unleaded gasoline at the pump fell 1 cent to $3.688 a gallon, according to the Daily Fuel Gauge Report from motorist advocacy group AAA and the Oil Price Information Service. The average is based on credit card swipes at 100,000 service stations.

Prices have fallen 10.4% since hitting a record high of $4.114 a gallon on July 17.

The dip comes after U.S. crude for October delivery saw the largest drop in 17 years, closing down $6.59 to settle at $114.59 a barrel on the New York Mercantile Exchange.

Gas prices remain about 99 cents, or 33.7%, higher than a year ago.

State prices: Gasoline exceeded $4 a galllon in two states, Hawaii and Alaska, according to the survey. Alaska had the highest prices at $4.536 a gallon, down a penny from the previous day. Hawaii prices averaged $4.410, followed by Utah at $3.970, Idaho at $3.961 and California at $3.960.

Missouri had the cheapest gas, with prices falling to $3.443 a gallon. Prices in South Carolina were the second lowest at $3.457, followed by Tennessee at $3.484.

California authorities have rebuffed a request to investigate whether Sen. Charles Schumer helped fuel IndyMac Bancorp Inc.’s collapse by expressing concerns about the major mortgage lender’s soundness.

The California Attorney General’s office said in a letter Thursday that there was “insufficient evidence” to investigate the New York Democrat under a state law against making false statements or spreading rumors about a bank’s solvency.

Schumer’s statements in June 26 letters to bank regulators were true and apparently drawn from public information, Assistant Attorney General Thomas Greene wrote. He also noted that the U.S. Constitution protects members of Congress from being prosecuted or sued for remarks made in their official capacity.

“Finally, while Senator Schumer’s statements may have accelerated public concern about IndyMac’s financial condition, we do not believe that we can prove that they caused the bank’s failure,” Greene wrote.

Schumer spokesman Brian Fallon declined to comment Saturday. He had previously said the information in the letters was true and publicly available.

Depositors scrambled

Former IndyMac employees sought the probe, saying Schumer’s publicly released letters spurred a run on the Pasadena, Calif.-based bank that led to a July 11 government takeover. IndyMac was the second-largest financial institution to fail in U.S. history, regulators said.

The bank had suffered huge losses on mortgage-backed securities when Schumer communicated his “concern for the safety-and-soundness risks posed by IndyMac.” He asked regulators what steps they were taking to prevent a collapse.

During the next 11 days, depositors scrambled to withdraw more than $1.3 billion. Regulators then seized IndyMac as hundreds of California customers waited on line for hours to demand their money. The Federal Deposit Insurance Corp. now operates IndyMac under a conservatorship.

Some regulators said Schumer bore part of the blame for the bank’s collapse, as did the 51 former workers who sought the California probe.

Schumer’s spokesman said earlier this week that “while we certainly empathize with the plight of the employees, their ire is better directed at the management of IndyMac.”

Do Washington policymakers listen too much to Wall Street? A possible bailout of Fannie Mae and Freddie Mac, on the heels of similar action involving investment firm Bear Stearns, seems to send a loud signal to financial companies that the government will clean up their messes.

That’s the feeling of some analysts and academics here Saturday, the final day of a high-profile economics conference. The Federal Reserve’s handling of the worst financial crisis to hit the country in decades spurred much debate.

“The Fed listens to Wall Street,” said Willem Buiter, professor of European political economy at the London School of Economics and Political Science. “Throughout the 12 months of the crisis, it is difficult to avoid the impression that the Fed is too close to the financial markets and leading financial institutions, and too responsive to their special pleadings, to make the right decisions for the economy as a whole,” he wrote in a paper presented to the conference.

Critics like Buiter worry that the Fed’s unprecedented actions _ including financial backing for JPMorgan Chase & Co.’s takeover of Bear Stearns Cos. _ are putting taxpayers on the hook for billions of dollars of potential losses. They also say it encourages “moral hazard,” that is, allowing financial companies to gamble more recklessly in the future.

Fed Chairman Ben Bernanke, who spoke to the conference on Friday, defended the Fed’s actions, saying they were “necessary and justified” to avert a meltdown of the entire financial system, which would have devastated the U.S. economy.

Yet, Bernanke also acknowledged that mitigating moral hazard is one of the critical challenges policymakers face as they weigh steps _ including strengthening regulation _ to make the financial system better able to withstand shocks down the road.

“If no countervailing actions are taken, what would be perceived as an implicit expansion of the safety net could exacerbate the problem of `too big to fail,’ possibly resulting in excessive risk-taking and yet greater systemic risk in the future,” Bernanke said.

At the start of the conference, on Thursday night, Thomas Hoenig, president of the Federal Reserve Bank of Kansas City, which sponsored the forum, gave Bernanke a white hard hat _ like those worn by construction workers _ in case he needed protection from critics during the sessions.

Even as Bernanke and others discussed these thorny issues, concern on Wall Street grew about the financial health of Fannie Mae and Freddie Mac. Investors are becoming increasingly convinced that a government bailout of the mortgage giants will be inevitable. Those fears hammered the companies stocks again this week.

The Treasury Department, under a new law enacted last month, has the power to inject the companies with huge amounts of cash _ through loans or buying stock in them.

“It creates a troubling perception when Washington policymakers appear to be hitting the fast-forward button when major institutions are on the line but are between the pause and the slow-motion button when massive home foreclosures are on the line,” said Gene Sperling, a former official in the Clinton administration and now a senior fellow for economic studies at the Council on Foreign Relations.

The roots of the current crisis can be traced to lax lending for home mortgages _ especially subprime loans given to borrowers with tarnished credit _ during the housing boom. Lenders and borrowers were counting on home prices to keep rising. But when the housing market went bust, home prices plummeted in many areas of the country. Foreclosures spiked as people were left owing more on their mortgage than their home was worth. Rising rates on adjustable mortgages also clobbered some homeowners.

“Market participants failed to soundly manage, measure and disclose risks, with ignorance, greed or hubris playing their customary roles,” said Mario Draghi, the governor of the Bank of Italy, who is involved in international efforts to deal with the worldwide financial crisis.

As U.S. financial companies racked up multibillion-dollar losses on soured mortgage investments, and credit problems spread globally, firms hoarded cash and clamped down on lending. That has crimped consumer and business spending, dragging down the national economy _ a vicious cycle the Fed has been trying to break.

To brace the wobbly economy, the Fed has slashed its key interest rate by a whopping 3.25 percentage points, the most aggressive rate-cutting campaign in decades. Yet, those cuts also aggravated inflation. Some wonder whether the Fed made money too cheap, something that could feed into other bubbles in the future.

“The alarms of the financial sector have been overstated. The real economy has slowed down but is not yet in severe difficulty,” said C. Fred Bergsten, director of the Peterson Institute for International Economics.

Anil Kashyap, professor of economics and finance at the University of Chicago’s Graduate School of Business, however, said the Fed did the right thing. “It headed off disaster. The history of financial crises tells you the economy doesn’t get sick the next week. It takes a while.”

In fact, a growing number of analysts believe the economy could hit a deep pothole later this year as the bracing impact of the government’s tax rebate checks wears off.

The Fed also has taken a number of unconventional _ and some controversial _ actions to shore up the shaky financial system and to get credit, the economy’s lifeblood, flowing more freely. It agreed in March to let investment houses draw emergency loans directly from the central bank. And, in July, the Fed said Fannie Mae and Freddie Mac also could tap the program. For years, such lending privileges were extended only to commercial banks, which are subject to stricter regulatory supervision.

In providing financial backing to JP Morgan’s takeover of Bear Stearns, the Fed worried that the investment house’s collapse could cascade, taking down others. But some were skeptical.

“In the case of Bear Stearns it is not clear from publicly available information how much contagion there would have been had it been allowed to fail,” according to a paper presented at the conference by Franklin Allen, professor at the University of Pennsylvania, and Elena Carletti, professor at the University of Frankfurt.

Over the last month, the Dollar has rallied tremendously, rising over 7% against its main adversary, the Euro. The price of gold, which serves as an inverse proxy for investor confidence in the USD, has fallen dramatically. As a result, many analysts have proclaimed that the Dollar has (permanently) bottomed out, and are busying themselves preparing projections for how high the Dollar will rise. But is the Dollar rally sustainable?

In the short-term, I would argue the answer is yes. The bubbles in the various sectors of commodity markets seem to have partially deflated, with oil and certain food staples well below the record highs they touched earlier in the year. As a result, inflation may soon begin to abate, and return to a comfortable level as early as 2009. More importantly, the US economy was among the first to be affected by the credit and real estate crises. Some analysts have argued that the worst developments have already come to pass. The crisis has since spread to the global economy, with other countries sharing in some of the burden. The result is that the US economic and monetary cycle is probably ahead of most of its peers. Accordingly, by the time the full impact of the crisis is felt by the rest of the world, the US should firmly be on the path to recovery. As other Central Banks move to ease their respective monetary policies, the Fed should be in a position to hike rates, providing further support for the Dollar.

As a result of this belief, US capital markets have received a sudden inflow of capital. This trend has been further buoyed by the notion that the US is the safest place to invest in times of crisis is gaining traction among investors. If the credit crisis continues to spread, this notion will no doubt be reinforced.

The long-term picture is of course more nuanced. The US will hardly emerge from the current crisis unscathed, and the ultimate cost of the credit crisis could exceed $1 Trillion. In addition, the US is unlikely to be shamed into changing its nasty habit of spending more than it saves. Accordingly, the twin deficits, those permanent thorns in the side of the Dollar, will probably persist. In addition, recent history suggests that investors are slow to absorb the lesson that There is No Such Thing as a Free Lunch. Despite the horrible collapse of the dot-com bubble, investors piled willy-nilly into the real estate market, with the result speaking for itself. Analysts are already speculating where the next bubble will occur; perhaps in alternative energy?

In conclusion, while the near-term prospects of the Dollar are surprisingly bright, the long-term prognosis is less so. There is no indication that the structural weaknesses in the US economy that led to the credit crisis and the multi-year decline in the USD that preceded it, will abate following its resolution. The future is inherently unpredictable, but I would expect the Dollar to continue declining once the global economy is back on track, perhaps in 2010.

In his headline remarks at the annual conference for members of America’s Federal Reserve Bank, Chairman Ben Bernanke reiterated his comfort with the current level of interest rates. He argued that while interest rates are certainly low by historical standards, a decline in inflation over the next few months should bridge the gap between the two. In addition, the credit crisis remains ongoing, and it is clear that Bernanke is more concerned about economic growth than inflation. Bernanke’s comments are supported by the recent Dollar rally and the simultaneous easing of commodity prices. At the same time, data indicate that over the last twelve months, prices have risen at the fastest pace in nearly 17 years. If futures contracts are any indication, investors basically accept Bernanke’s position, but not by much. Bloomberg News reports:

Traders added to bets that the Fed will increase borrowing costs by the end of the year, futures prices show. Odds of at least a quarter point boost in the main rate by the end of December rose to 32 percent from 18 percent yesterday.

Read More: Bernanke Says U.S. Inflation Should Slow Into 2009

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