Dollar Raring to Resume its Decline

By Jason Simpkins

The dollar made a small rally last week, taking much of the upward pressure off commodities. But that rally may be short-lived, as many analysts expect the dollar to continue its downward decline after its brief rally.

The dollar traded as high as $1.511 per euro Thursday, which put it within in striking distance of its first weekly gain against the euro in more than a month. The dollar gave back some of those gains on Friday, sinking to a value of $1.544 per euro in early trading. The dollar bought 99.39 yen on Friday, up 0.4% for the week.

"The dollar is enjoying a bounce," Hideki Amikura, deputy general manager of currencies at Nomura Trust and Banking Co. (NMR), told Bloomberg News. "The Fed is working to restore credit confidence. U.S. investment bank earnings weren’t as dire as some predicted."

Commodities reflected the dollar’s gains last week by posting significant losses. Gold, which last Monday hit a record high of $1,034 an ounce, traded as low as $919.20 an ounce Friday, a 11.1% drop. Oil, which also traded at a record high last Monday, trading at $111.80 a barrel, fell below the $100 mark Thursday for the first time in two weeks.

However, the sharp drop in commodities wasn’t solely attributable to the rise of the dollar. Position unwinding and profit taking exaggerated the price drops, as underlying fundamentals do not support record high commodities prices.

Last week, when the U.S. Department of Energy said that the demand for oil was beginning to wane amid a global economic downturn, commodities traders were forced to recognize that commodities are not immune from the downward pressure of an economic slowdown. The Energy Information Administration’s weekly inventory report said Wednesday that overall consumption of oil and its products fell 3.2% over the last four weeks compared with the same period last year.

Meanwhile, most analysts believe that, despite recent gains, the dollar still has further to drop, especially in light of the U.S. Federal Reserve’s massive injections of liquidity.

In one of the most aggressive rate-cutting campaigns in a generation, the policymaking Federal Open Market Committee [FOMC] has cut the benchmark Federal Funds rate six times in the past seven months taking it from 5.25% to 2.25%. The most recent reduction came last week, when central bank policymakers pared the benchmark short-term rate by three quarters of a percentage point.

Money Morning Investment Director Keith Fitz-Gerald believes that Fed Chairman Ben S. Bernanke is selling the dollar down the river.

"The government has adopted a weak-dollar policy," Fitz-Gerald said. "They’re sending out a message loud and clear: ‘We want you to sell the dollar.’"

The dollar may be granted a temporary reprieve from speculative investors looking to cash in on a currency they view as being oversold. But a sustained dollar rebound may not be in the making for quite some time.

"Until global traders decide the dollar has had enough, I don’t expect a rebound," Fitz-Gerald said. "Not while Bernanke is busy debasing our currency."

As far as commodities go, Fitz-Gerald thinks the long-term outlook remains bullish and any pullback represents another opportunity to buy in.

"I’m a long-term commodity bull no question about it," he said. "Commodities may drop further, but that will be a function of fear about slowing economies, not a lack of demand."

News and Related Story Links:

• International Herald Tribune:
  Federal Reserve, commodities could lift dollar next week

• Bloomberg:
  Dollar Set for Weekly Gain on Fed Steps to Restore Confidence

• Money Morning:
  Is the Fed Fueling the Inflation Fire?
• Money Morning News Analysis:
  Commodities Fall Out of Favor as the Dollar Strengthens.
• Money Morning News Analysis:
  With Latest Rate Cut, Fed Tries to Find Balance Between Recession and Inflation.