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Dollar Correction Continues to Build Strength with Declines in Silver

May 12, 2011 8:59 AM ET
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Forexyard's Blog
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The rally in the dollar continues to build on last week’s gains as silver prices have fallen below last week’s low in line with gold and crude oil prices. The sell-off in commodities and global equities has helped to strengthen the dollar as long commodity trades are unwound.


Silver is limit down today as the selling from yesterday carried over into today’s European trading. The commodity is being sold as a bout of risk aversion has hit financial markets. An initial cause of the selling may be linked to a flare up in the Greek debt crisis as European leaders search for alternative measures. According to a Dow Jones Newswires a majority of European countries believe a Greek debt restructuring (also known as default) is inevitable.


Another explanation for the sell-off in commodities may be due to the expected ending of the Fed’s QEII program. With the withdrawal of liquidity and cheap funding opportunities, the supply of commodity buyers are dwindling, leaving speculators holding onto silver at prices above the $40 level. 


Silver prices plummeted for the second consecutive day, trading on their low of $32.57 from $32.30. The commodity is down 16% over the past two days. Interestingly enough, today’s low coincides with trend line rising off of the late August and January lows. After such sharp declines in silver prices, one must ask at what point will real money reenter the picture and begin bidding the price higher.


Other commodities are also lower with crude oil trading below $100 at $95.23 and gold falling lower to $1477 from $1504.


In addition to the selloff in commodities there are other signs of risk aversion. Global bourses are lower with the FTSE trading down by 1.26% and the Nikkei falling by 1.50%.


The selling of equities and commodities has helped to strengthen the dollar as the correction lower continues. Today the EUR/USD dropped to a low of 1.4123, below the 1.4150 support/38.2% Fibonacci retracement from the January to May move. Sterling is lower at 1.6234 versus the dollar despite yesterday’s monetary policy changes announced by the Bank of England.


The dollar correction continues to build strength with the decline in commodities and the greenback should be supported as long as silver and other commodity trades are unwound.

Russell Glaser

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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