A growing number of nations are negotiating to drop the use of the U.S. dollar as the currency used to trade oil, which originally would be replaced by a basketfull of currencies, and over the long haul an as yet undetermined currency.
Inluded in the countries currently negotiating are France, the Arab states, Japan, China, Russia, and Brazil. India may eventually get on board as well, making it a considerable force in the future. Goals are to make the change from trading oil in U.S. dollars to a basket of currencies by 2018.
Nations understand the extraordinary and misguided practices and policies of the U.S. government and the way it has spent money to bailout the numerous industries they refuse to allow to fail, and the amazing size of the debt incurred to do it.
All this means the U.S. dollar will continue to fall in value as the printing of money continues from the Federal Reserve.
America will find itself struggling to maintain its economic dominance as a result, and there's literally nothing that can be done about it unless the horrid economic policies are abandoned and the political will is there to make it happen.
It's doubtful that will happen any time soon, and so we'll probably have to go through a lot more pain before America and its politicians abandon the economic path they're traveling and return to financial sanity.
Showing posts with label U.S. Dollar. Show all posts
Showing posts with label U.S. Dollar. Show all posts
Monday, October 5, 2009
Tuesday, January 20, 2009
Corn Results | Wheat, Soybeans Pressuring Prices
Corn results today are wheat and soybeans pressuring the prices down, along with a stronger U.S. dollar.
Chicago Board of Trade corn futures succumbed to outside pressure Tuesday, ending lower amid falling wheat and soybean markets, traders said.
March corn ended down 7 1/2 cents to $3.83 1/2 per bushel, May corn ended down 7 cents to $3.94 3/4 and July corn ended down 7 cents to $4.05 1/2.
The market had been higher for much of the day despite lower wheat and soybeans, but corn sank as those markets extended their losses.
"Wheat and beans are slam-dunking corn," said Vic Lespinasse, analyst for grainanalyst.com.
Weak crude oil and a stronger dollar weighed on corn and other commodities, analysts said.
The market climbed in early trading on technical strength and follow-through from Friday's sharp gains, said Shawn McCambridge, senior grains analyst for Prudential Bache. But McCambridge and other analysts said the market does not have a good reason to rally sharply.
"I think we're going to have to have some kind of a fundamental backing in order to continue to extend these gains," McCambridge said.
The demand outlook remains weak, with exports, ethanol and feed demand all suffering.
Traders noted a continued unwinding of the corn-soybean spread due to concerns that corn is losing acres to soybeans. Those concerns flared again with Informa Economics acreage projection released on Friday, a trader said. Some analysts said concerns about corn losing acreage are overblown, however.
Corn climbed above $4 in the March contract overnight and again early Tuesday, but retreated each time.
A trader called $4 "massive resistance," although McCambridge called it "a psychological benchmark we continue to watch."
South American weather remains a key focus of both corn and soybeans, and continued dry weather in Argentina is fueling concerns about crop damage. But support from the continuing dry weather there was mitigated by beneficial rains in Brazil, traders said.
CBOT oats futures ended lower. March oats were down 8 1/2 cents to $2.14 per bushel and May oats were down 8 1/2 cents to $2.23 1/4.
Ethanol futures were unchanged to slightly lower. February ethanol ended flat at $1.612 per gallon and March ethanol ended down $0.013 to $1.617.
-By Ian Berry, Dow Jones Newswires; 312-341-5778; ian.berry@dowjones.com
(END) Dow Jones Newswires
01-20-09 1527ET
Copyright (c) 2009 Dow Jones & Company, Inc.
Conclusion:
Results for corn will continue to push downward in conjunction with wheat and soybeans. Oil prices didn't help, also falling, neither did the U.S. dollar getting stronger today help.
Chicago Board of Trade corn futures succumbed to outside pressure Tuesday, ending lower amid falling wheat and soybean markets, traders said.
March corn ended down 7 1/2 cents to $3.83 1/2 per bushel, May corn ended down 7 cents to $3.94 3/4 and July corn ended down 7 cents to $4.05 1/2.
The market had been higher for much of the day despite lower wheat and soybeans, but corn sank as those markets extended their losses.
"Wheat and beans are slam-dunking corn," said Vic Lespinasse, analyst for grainanalyst.com.
Weak crude oil and a stronger dollar weighed on corn and other commodities, analysts said.
The market climbed in early trading on technical strength and follow-through from Friday's sharp gains, said Shawn McCambridge, senior grains analyst for Prudential Bache. But McCambridge and other analysts said the market does not have a good reason to rally sharply.
"I think we're going to have to have some kind of a fundamental backing in order to continue to extend these gains," McCambridge said.
The demand outlook remains weak, with exports, ethanol and feed demand all suffering.
Traders noted a continued unwinding of the corn-soybean spread due to concerns that corn is losing acres to soybeans. Those concerns flared again with Informa Economics acreage projection released on Friday, a trader said. Some analysts said concerns about corn losing acreage are overblown, however.
Corn climbed above $4 in the March contract overnight and again early Tuesday, but retreated each time.
A trader called $4 "massive resistance," although McCambridge called it "a psychological benchmark we continue to watch."
South American weather remains a key focus of both corn and soybeans, and continued dry weather in Argentina is fueling concerns about crop damage. But support from the continuing dry weather there was mitigated by beneficial rains in Brazil, traders said.
CBOT oats futures ended lower. March oats were down 8 1/2 cents to $2.14 per bushel and May oats were down 8 1/2 cents to $2.23 1/4.
Ethanol futures were unchanged to slightly lower. February ethanol ended flat at $1.612 per gallon and March ethanol ended down $0.013 to $1.617.
-By Ian Berry, Dow Jones Newswires; 312-341-5778; ian.berry@dowjones.com
(END) Dow Jones Newswires
01-20-09 1527ET
Copyright (c) 2009 Dow Jones & Company, Inc.
Conclusion:
Results for corn will continue to push downward in conjunction with wheat and soybeans. Oil prices didn't help, also falling, neither did the U.S. dollar getting stronger today help.
Monday, October 13, 2008
Oil Prices Rise on Enthusiasm, not Fundamentals
Oil prices increased by $3.49 to end the session at $81.19 a barrel for November delivery, as leaders presented a unity to the world in an effort to shore up confidence in the global marketplace. Oil basically rose on that euphoria, rather than any change in fundamentals.
Brent North Sea crude in London gained close to light sweet crude in the U.S., as it increased by $3.37 a barrel to $77.46.
Even so, the slowing demand for oil hasn't changed, and nothing, other than the possibility that the emergency meeting by OPEC next month may result in resistance to downward price pressures, will stop the price of oil from continuing to fall. They would attempt to do that by lowering production levels.
If they were to do that, there would probably be significant international pressure for them to keep production levels close to where they are.
In other financial news, the Dow Jones Industrial Average recorded its highest one-day point gain in history, gold continues to fall, and the U.S. dollar fell against many major currencies, even though an unprecedented unlimited dollar fund auction will be held by the central banks of several nations.
Brent North Sea crude in London gained close to light sweet crude in the U.S., as it increased by $3.37 a barrel to $77.46.
Even so, the slowing demand for oil hasn't changed, and nothing, other than the possibility that the emergency meeting by OPEC next month may result in resistance to downward price pressures, will stop the price of oil from continuing to fall. They would attempt to do that by lowering production levels.
If they were to do that, there would probably be significant international pressure for them to keep production levels close to where they are.
In other financial news, the Dow Jones Industrial Average recorded its highest one-day point gain in history, gold continues to fall, and the U.S. dollar fell against many major currencies, even though an unprecedented unlimited dollar fund auction will be held by the central banks of several nations.
Wednesday, October 8, 2008
Corn Prices Move Up After Fed and Other Central Banks Cut Interest Rates
Corn for December delivery on the Chicago Board of Trade climbed by 10.5 cents Wednesday after the U.S. Federal Reserve and several other central banks around the world cut their interest rates. After the interest rate cuts corn did rebound settling at $4.275 a bushel on the CBOT, a 10.5 cent or 2.52 percent gain.
While many other commodities dropped, which temporarily made central banking officials feel good because of the usual response of inflation emerging from declining interest rates, corn was one of the few that responded in the positive as demand falls because of a variety of inflationary pressures.
Interest rates in the U.S. were cut from 2 percent to 1.5 percent in hopes of stimulating the economy. Other central banks working in unison with the Fed cut rates by half a percent as well.
While many other commodities dropped, which temporarily made central banking officials feel good because of the usual response of inflation emerging from declining interest rates, corn was one of the few that responded in the positive as demand falls because of a variety of inflationary pressures.
Interest rates in the U.S. were cut from 2 percent to 1.5 percent in hopes of stimulating the economy. Other central banks working in unison with the Fed cut rates by half a percent as well.
Monday, October 6, 2008
Economic Fears Spread to Europe as Oil Continues to Tumble
Oil continues its nosedive as demand continues to slacken in response to economic fears spreading in Europe.
Oil consumption in the U.S. fell by 7.1 percent over the last four weeks in contrast to last year during the same time. Use is now at about 19 million barrels a day in the U.S.
Crude had dropped as low as $87.56 a barrel in the afternoon, while settling at $87.80 for November delivery of light sweet crude. That was a fall of $6.07 for the day.
Brent North Sea crude also fell significantly, settling at $83.68 a barrel for November delivery, dropping $6.57 for the session.
The lagging participation of the European economy in the economic downturn is now over, and what has happened in the U.S. is now emerging in Europe. That has also caused the U.S. dollar to strengthen significantly against the euro, while also causing gold to be held back for now as a safe haven.
For oil, the new world of bailouts and economic fears leaves it in a place of probable continued decline in price as demand slows around the globe. India and China demand will slow as well, with China now exporting some gasoline because of slow domestic demand.
As far as the U.S. bailout by the government, it didn't do much to placate investors, as they have started to pour their money into short-term dollar-denominated financial instruments like U.S. Treasuries.
Oil consumption in the U.S. fell by 7.1 percent over the last four weeks in contrast to last year during the same time. Use is now at about 19 million barrels a day in the U.S.
Crude had dropped as low as $87.56 a barrel in the afternoon, while settling at $87.80 for November delivery of light sweet crude. That was a fall of $6.07 for the day.
Brent North Sea crude also fell significantly, settling at $83.68 a barrel for November delivery, dropping $6.57 for the session.
The lagging participation of the European economy in the economic downturn is now over, and what has happened in the U.S. is now emerging in Europe. That has also caused the U.S. dollar to strengthen significantly against the euro, while also causing gold to be held back for now as a safe haven.
For oil, the new world of bailouts and economic fears leaves it in a place of probable continued decline in price as demand slows around the globe. India and China demand will slow as well, with China now exporting some gasoline because of slow domestic demand.
As far as the U.S. bailout by the government, it didn't do much to placate investors, as they have started to pour their money into short-term dollar-denominated financial instruments like U.S. Treasuries.
Wednesday, September 17, 2008
Corn Rides Returning Favor of Commodities as Investors run for Cover
December delivery for corn increased by 22 cents a bushel, riding the migration of investors to commodities as they seek shelter from the financial markets. Corn closed at $5.54 a bushel on the Chicago Board of Trade.
Most dollar-denominated commodities were benefactors of the exodus from equities.
Soybeans were also up on the day, increasing by 26 cents to $11.39 a bushel, a 1.3 percent jump.
The U.S. dollar index was down as the greenback fell against most major currencies.
Most dollar-denominated commodities were benefactors of the exodus from equities.
Soybeans were also up on the day, increasing by 26 cents to $11.39 a bushel, a 1.3 percent jump.
The U.S. dollar index was down as the greenback fell against most major currencies.
Thursday, August 21, 2008
CBOT Corn Futures Surpass $6 First Time in Almost Three Weeks
For the first time in about three weeks, corn futures on the Chicago Board of Trade surged past the $6 mark, as the U.S. dollar weakens on stronger oil prices and geo-political concerns.
Nearby September corn on the CBOT increased by 22 1/2 cents to $5.97 3/4, and most-active December gained 22 1/2 cents to end at $6.17 1/2 a bushel.
One other factor in the price of corn futures is Midwest rain may not be enough to pull corn through to a strong harvest. It's also slightly possible that later maturity levels could make corn vulnerable to frost further on in the season.
Kernals now filling out may not be helped by the forecasted wet weather over the next 7-10 days in the midwest.
Corn exports also fell far below the projected 850,000 to 1.4 million tons looked for; only 691,500 metric tons sold the week ending August 14.
According to the U.S. Department of Agriculture, 196,600 metric tons were sold for 2007-08, while 494,900 tons were sold for 2008-09.
Nearby September corn on the CBOT increased by 22 1/2 cents to $5.97 3/4, and most-active December gained 22 1/2 cents to end at $6.17 1/2 a bushel.
One other factor in the price of corn futures is Midwest rain may not be enough to pull corn through to a strong harvest. It's also slightly possible that later maturity levels could make corn vulnerable to frost further on in the season.
Kernals now filling out may not be helped by the forecasted wet weather over the next 7-10 days in the midwest.
Corn exports also fell far below the projected 850,000 to 1.4 million tons looked for; only 691,500 metric tons sold the week ending August 14.
According to the U.S. Department of Agriculture, 196,600 metric tons were sold for 2007-08, while 494,900 tons were sold for 2008-09.
Tuesday, August 5, 2008
Corn Futures Drop to Lowest Level in Four Months
For the fourth straight session corn futures fell, dropping as low as $5.26 earlier in the day, the lowest level in four months on the CBOT.
The major driver of the drop is the cooling weather, as pollination will increase in response to cooler weather conditions, increasing corn yields. This helps to address the opposite concerns that hot weather would cause corn prices to surge through an even lower pollination rate.
"A forecast for relatively cooler weather this week will be beneficial for" corn's pollination, said Elaine Kub, a grain analyst at commodities research firm DTN.
Even so, according to the U.S. Department of Agriculture, as of August 3, pollination of corn was down from the five-year average of 91 percent, with 83 percent pollinating at this time. The cooler weather will increase that percentage, and probably bring it closer in line with past performance.
Another factor is the strengthening U.S. dollar, which has brought downward pressure on commodities in general, including corn.
The major driver of the drop is the cooling weather, as pollination will increase in response to cooler weather conditions, increasing corn yields. This helps to address the opposite concerns that hot weather would cause corn prices to surge through an even lower pollination rate.
"A forecast for relatively cooler weather this week will be beneficial for" corn's pollination, said Elaine Kub, a grain analyst at commodities research firm DTN.
Even so, according to the U.S. Department of Agriculture, as of August 3, pollination of corn was down from the five-year average of 91 percent, with 83 percent pollinating at this time. The cooler weather will increase that percentage, and probably bring it closer in line with past performance.
Another factor is the strengthening U.S. dollar, which has brought downward pressure on commodities in general, including corn.
Saturday, August 2, 2008
The US dollar and Oil
Prior to the oil price going through the roof last Friday, something unusual occurred - the US dollar rallied. The stronger greenback impacted the commodity markets, with oil, base metals and the Dow Jones Industrials for that matter all falling sharply.
The source of the beleaguered US dollar's rally was hawkish inflation comments from Fed Chairman Ben Bernanke, in a speech at the International Monetary Conference in sunny Barcelona, Spain. The foreign exchange market's ears pricked up with the following words:
"In collaboration with our colleagues at the Treasury, we continue to carefully monitor developments in foreign exchange markets. The challenges that our economy has faced over the past year or so have generated some downward pressures on the foreign exchange value of the dollar, which have contributed to the unwelcome rise in import prices and consumer price inflation. We are attentive to the implications of changes in the value of the dollar for inflation and inflation expectations and will continue to formulate policy to guard against risks to both parts of our dual mandate, including the risk of an erosion in longer-term inflation expectations."
It's extraordinary that after years of US dollar weakness, the Fed decides that now is the time to act concerned. We believe there are a few reasons for this change of tact, mainly political. But there are many more reasons why the Fed's words are unlikely to be backed up with actions, and for this reason, we expect continued US dollar weakness and rising inflation in the years ahead.
Let's put Bernanke's dollar comments into context.
Since September last year the Fed has slashed interest rates from 4.75% to 2%, a massive reduction in nominal terms. But in an inflationary environment, the reduction in real interest rates has been even greater. With inflation running around 4% (officially...) real rates are negative.
While the Fed's intent was to prop up careless Wall Street investment banks, negative real rates have caused frenzied speculation in the commodity markets, most notably oil. Following the recent round of interest rate cuts, the oil price rallied to more than US$130 a barrel, a level that is clearly destabilising for the global economy.
Markets were not helped either by Israel's threats to attack Iran should the Iranians continue to develop a nuclear capability. How this development will play out is anyone's guess but with Iranian President Mahmoud Ahmadinejad threatening to destroy Israel a few years ago, it is unlikely that the Israeli's are bluffing. There is also a precedent in 1980 when Israeli jets bombed a nuclear reactor that was being built in Iraq,
US Treasury Secretary Henry Paulson has had his hands full in the Middle East, where he had face to face talks with one of the US Treasury's biggest group of lenders, OPEC. Oil producing nations have for decades recycled billions of US petro dollars back into US treasury bonds and securities, thus providing financial support for the dollar. But there are signs this relationship may be coming to an end.
Inflation, which has lain dormant for many decades, is now making a come back that Elvis would be proud of. The once harmonious relationship that existed between the US and OPEC is no longer comfortable.
Most of the Mid East oil producers have their currencies pegged to the dollar, which means they cannot conduct monetary policy independently. So when US rates fall, their official interest rates also decline.
As a result, inflation is running at double-digit rates in most of these countries, which is in turn leading to questions over whether the currency pegs should be maintained (and indeed China is asking itself the same question). With a chronically weak US dollar, these countries are massively disadvantaged. As well as importing inflation, a socially destabilising effect, they are selling a finite asset (crude oil) for depreciating dollars.
So Henry Paulson's recent trip to the Mid-East would have made for particularly interesting conversation. OPEC's support for the US dollar is crucial. Because oil is priced in dollars, all oil production is 'monetised' in US dollars and provides a huge source of demand for the Greenback. We believe that without OPEC being onside, the US dollar is completely exposed.
Imagine if oil were all of a sudden traded in euro's? The US, with its huge oil bill, would no longer be able to print dollars (issue treasury bonds to OPEC and China) to pay the bills. Instead, it would be required to borrow euro's to buy the required amount of oil. Nearly every other country around the world would also be in the position of no longer having to buy dollars to pay for oil.
While a switch to the euro (or a basket of currencies) is not about to happen any time soon, this explanation provides some idea of how interlinked the US dollar and oil are, and inevitably, the price of gold. Behind closed doors Henry Paulson was undoubtedly given some stern words over the strength of the US dollar, or lack thereof. "If you want us to maintain our currency pegs, stop devaluing your currency." Or words to that effect.
And as Bernanke noted in his speech in Barcelona, "in collaboration with our colleagues at the Treasury...we are attentive to the implications of changes in the value of the dollar for inflation..."
Given Paulson has zero credibility in talking up the dollar (he of the strong dollar mantra) he has obviously 'collaborated' with the Federal Reserve and enlisted the credible Bernanke to try and win the FX market over. And they listened, for a few days at least. We suspect that the very short term speculators were spooked out of their positions, and the dollar benefitted from short covering. On the flip side, commodities and commodity related stocks sold off sharply.
But the reality is that Bernanke will have to do more than just 'talk the dollar up'. Soon after Bernanke's comments last Tuesday, the European Central Bank was again talking tough on inflation (they have better form in managing inflation expectations) and the dollar promptly sold off against its main rival, the euro.
Then, in US trade on Friday, firm evidence arrived that the US economy is indeed slowing down, with the unemployment rate soaring from 5% to 5.50% following the release of May's payroll statistics.
These numbers confirmed to us that if the US economy is to avoid a deep recession, interest rates will remain low, and by implication, real interest rates will remain negative.
The geopolitics now being played out in the Middle East add another layer of complexity to the oil market. And with Barrack Obama being the clear favourite for the Whitehouse at the end of the year, the risk of an Israel/Iran conflict is now rapidly escalating. We thought oil was due for a correction last week, but the threat of Israeli action could drive oil even higher, and this is now being reflected with a risk premium being priced into the market
This creates more headaches for the US in their attempts to control inflation.
Inevitably, no matter how much Bernanke tries to anchor 'inflationary expectations', the reality of negative real interest rates will ensure inflation in the US (and globally for that matter) continues to gather momentum.
The attached chart shows the recent performance of long term US Government bond yields. If inflationary pressures continue to build, and we suspect they will, bond yields will slowly rise and bond prices will slowly fall.
The reality is that if the US wants to fight inflation, it must raise rates. As we have repeatedly stated, we do not see that as a realistic policy option for the US and we believe the authorities will continue to 'manage' the US dollar lower. The extraordinary volatility we are witnessing in the markets on an almost daily basis is the result of these huge imbalances that have become embedded in the global economy. The market is now attempting to right these imbalances through a serious bout of global US dollar inflation, which is being passed on to every other nation in the world.
About the Author
Fat Prophets are leading global independent stock market advisors with a comprehensive product range of research reports for all investors. Visit the Fat Prophets website to learn more and get expert advice on investing in shares and managed funds.
The source of the beleaguered US dollar's rally was hawkish inflation comments from Fed Chairman Ben Bernanke, in a speech at the International Monetary Conference in sunny Barcelona, Spain. The foreign exchange market's ears pricked up with the following words:
"In collaboration with our colleagues at the Treasury, we continue to carefully monitor developments in foreign exchange markets. The challenges that our economy has faced over the past year or so have generated some downward pressures on the foreign exchange value of the dollar, which have contributed to the unwelcome rise in import prices and consumer price inflation. We are attentive to the implications of changes in the value of the dollar for inflation and inflation expectations and will continue to formulate policy to guard against risks to both parts of our dual mandate, including the risk of an erosion in longer-term inflation expectations."
It's extraordinary that after years of US dollar weakness, the Fed decides that now is the time to act concerned. We believe there are a few reasons for this change of tact, mainly political. But there are many more reasons why the Fed's words are unlikely to be backed up with actions, and for this reason, we expect continued US dollar weakness and rising inflation in the years ahead.
Let's put Bernanke's dollar comments into context.
Since September last year the Fed has slashed interest rates from 4.75% to 2%, a massive reduction in nominal terms. But in an inflationary environment, the reduction in real interest rates has been even greater. With inflation running around 4% (officially...) real rates are negative.
While the Fed's intent was to prop up careless Wall Street investment banks, negative real rates have caused frenzied speculation in the commodity markets, most notably oil. Following the recent round of interest rate cuts, the oil price rallied to more than US$130 a barrel, a level that is clearly destabilising for the global economy.
Markets were not helped either by Israel's threats to attack Iran should the Iranians continue to develop a nuclear capability. How this development will play out is anyone's guess but with Iranian President Mahmoud Ahmadinejad threatening to destroy Israel a few years ago, it is unlikely that the Israeli's are bluffing. There is also a precedent in 1980 when Israeli jets bombed a nuclear reactor that was being built in Iraq,
US Treasury Secretary Henry Paulson has had his hands full in the Middle East, where he had face to face talks with one of the US Treasury's biggest group of lenders, OPEC. Oil producing nations have for decades recycled billions of US petro dollars back into US treasury bonds and securities, thus providing financial support for the dollar. But there are signs this relationship may be coming to an end.
Inflation, which has lain dormant for many decades, is now making a come back that Elvis would be proud of. The once harmonious relationship that existed between the US and OPEC is no longer comfortable.
Most of the Mid East oil producers have their currencies pegged to the dollar, which means they cannot conduct monetary policy independently. So when US rates fall, their official interest rates also decline.
As a result, inflation is running at double-digit rates in most of these countries, which is in turn leading to questions over whether the currency pegs should be maintained (and indeed China is asking itself the same question). With a chronically weak US dollar, these countries are massively disadvantaged. As well as importing inflation, a socially destabilising effect, they are selling a finite asset (crude oil) for depreciating dollars.
So Henry Paulson's recent trip to the Mid-East would have made for particularly interesting conversation. OPEC's support for the US dollar is crucial. Because oil is priced in dollars, all oil production is 'monetised' in US dollars and provides a huge source of demand for the Greenback. We believe that without OPEC being onside, the US dollar is completely exposed.
Imagine if oil were all of a sudden traded in euro's? The US, with its huge oil bill, would no longer be able to print dollars (issue treasury bonds to OPEC and China) to pay the bills. Instead, it would be required to borrow euro's to buy the required amount of oil. Nearly every other country around the world would also be in the position of no longer having to buy dollars to pay for oil.
While a switch to the euro (or a basket of currencies) is not about to happen any time soon, this explanation provides some idea of how interlinked the US dollar and oil are, and inevitably, the price of gold. Behind closed doors Henry Paulson was undoubtedly given some stern words over the strength of the US dollar, or lack thereof. "If you want us to maintain our currency pegs, stop devaluing your currency." Or words to that effect.
And as Bernanke noted in his speech in Barcelona, "in collaboration with our colleagues at the Treasury...we are attentive to the implications of changes in the value of the dollar for inflation..."
Given Paulson has zero credibility in talking up the dollar (he of the strong dollar mantra) he has obviously 'collaborated' with the Federal Reserve and enlisted the credible Bernanke to try and win the FX market over. And they listened, for a few days at least. We suspect that the very short term speculators were spooked out of their positions, and the dollar benefitted from short covering. On the flip side, commodities and commodity related stocks sold off sharply.
But the reality is that Bernanke will have to do more than just 'talk the dollar up'. Soon after Bernanke's comments last Tuesday, the European Central Bank was again talking tough on inflation (they have better form in managing inflation expectations) and the dollar promptly sold off against its main rival, the euro.
Then, in US trade on Friday, firm evidence arrived that the US economy is indeed slowing down, with the unemployment rate soaring from 5% to 5.50% following the release of May's payroll statistics.
These numbers confirmed to us that if the US economy is to avoid a deep recession, interest rates will remain low, and by implication, real interest rates will remain negative.
The geopolitics now being played out in the Middle East add another layer of complexity to the oil market. And with Barrack Obama being the clear favourite for the Whitehouse at the end of the year, the risk of an Israel/Iran conflict is now rapidly escalating. We thought oil was due for a correction last week, but the threat of Israeli action could drive oil even higher, and this is now being reflected with a risk premium being priced into the market
This creates more headaches for the US in their attempts to control inflation.
Inevitably, no matter how much Bernanke tries to anchor 'inflationary expectations', the reality of negative real interest rates will ensure inflation in the US (and globally for that matter) continues to gather momentum.
The attached chart shows the recent performance of long term US Government bond yields. If inflationary pressures continue to build, and we suspect they will, bond yields will slowly rise and bond prices will slowly fall.
The reality is that if the US wants to fight inflation, it must raise rates. As we have repeatedly stated, we do not see that as a realistic policy option for the US and we believe the authorities will continue to 'manage' the US dollar lower. The extraordinary volatility we are witnessing in the markets on an almost daily basis is the result of these huge imbalances that have become embedded in the global economy. The market is now attempting to right these imbalances through a serious bout of global US dollar inflation, which is being passed on to every other nation in the world.
About the Author
Fat Prophets are leading global independent stock market advisors with a comprehensive product range of research reports for all investors. Visit the Fat Prophets website to learn more and get expert advice on investing in shares and managed funds.
Tuesday, July 29, 2008
Strengthening U.S. Dollar and Decreasing Oil Demand Lowers Prices
September delivery for light, sweet crude dropped by $2.54 today, to close at its lowest level since June 10, settling at $122.19 on the Nymex. It dropped as low as $120.75 during the trading hours; something it hasn't done since May.
The higher cost of fuel has caused consumers to drive less, which has lowered the demand for oil; one of the major factors in its decline.
A stronger U.S. dollar has also been a factor, as investors abandoned commodities today to put their capital in equities, which drove up the DJIA by 266 points.
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