Falling Dollar, Gold Rising, Trend?

The dollar has fallen for 3 straight sessions now against a basket of six major currencies. Most commentaries will cite the idea that the various economic report coming out are unfavorable to the US dollar, however, this has been happening for a year now. The economic report that have been heard so far have not been favorable to the US dollar, however the dollar continually rallies to new highs. The consensus is that the dollar is the safest currency to hold worldwide in this period of economic downturn.  Also the stock market has been doing good in the past 2 weeks evidently reducing to some extent the demand for safe havens. What does this all mean? Evidently no one knows what’s really going on, because despite the fact that the stock market has been rallying, we still see government treasuries continuing their march towards 0 % yield. Actually some (about $30 billion) were auctioned at 0% yesterday. Investors and big money are not buying into the stock market rally.

A falling dollar makes a good case for a bounce in commodities, the Reuters/Jefferies CRB Index went up about 3.2 percent, and Gold had its largest jump this month. This happens because with a falling dollar, it is cheaper to buy commodities, thereby increasing the demand for these commodities.

As it has been said before on here, with the government rampart spending plan, and interest rates’ heading towards zero, inflation is an apparent beast in 2010, and with inflation, there is an even greater case for the support and rise of commodities. So are investors really beginning to worry about inflation, and think that the value of their dollar assets will depreciate heavily, hence the slight sell off in the dollar? Maybe, but I will think No! My reasons are as follows.

The Fed will be meeting on December 16 and it is very most likely (excuse my English) that they will cut rates again, some are speculating 50 basis point, which if they do it will bring the rate down to 0.75%, all in a bid to “save” the economy. I believe this is a major reason, if not the sole reason for the recent sell off in the dollar. US dollar traders are protecting themselves from a potential frenzy that may arise if we here the Fed actually cut by 50 basis point or 75 basis points.

Given this, in the long term, I have an interesting view of what may happen, many have proclaimed that the US recession will last another year, and I wonder what if we have some kind of chain reaction set off? What was intended to be a minor sell off in the dollar to protect profits, what if it turns into a rapid panic sell off, and investors not wanting to take a 0% return on their money, shift to buying stocks and gold, and those who are currently holding treasuries sell some of their treasuries to ride the bull train? This scenario is possibly unlikely, but is certainly a possibility. I believe this recession for the most part was a psychological one, and with the recent green that is being witnessed on the charts, it is very likely that some mental conditioning is going on.

We’ll let the market decide.

Happy Trading,

 

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