It would appear that a downtrend pattern in the Dollar has become entrenched and that the reason behind that slide is varied and highly debatable. Clearly, many sellers of the Dollar think that US interest rates are destined to remain low until there is clear-cut evidence of a recovery in the US economy, and that in turn seems to suggest that investors can get higher yields in other currencies. Others think that unrestrained borrowing and the soaring budget deficit are behind the slide in the Dollar, and that in turn would seem to leave the prospect of a sustained, long term downside action in the Dollar ahead.
With the Obama Administration recently suggesting to the G20 that a new world economic order was needed and in a UN speech suggesting that world superpowers can’t be allowed to dictate to lesser powers, it would seem that the Dollar is destined to see its prestige stripped even more. Maybe US officials are paving the way for a decline in the Dollar in hopes of securing a quicker recovery in the world’s largest economy, and as long as other central banks stand by, it is possible that the Dollar will continue to fall. In short, given both internal and external factors, we suspect that the December Dollar Index is poised to fall all the way back down to the early 2008 lows, below the 72.00 level. In the event that the Dollar sees consistent declines, it is possible that certain commodity prices will gain an added measure of strength. If the US does manage to hold interest rates down until the US and global recoveries are well underway and a falling Dollar accentuates upward price action in a host of critical commodities, it could facilitate inflationary conditions.
Clearly, investors worldwide have already begun to factor in some form of inflation in the wake of the worst economic debacle in 50 years, as money is flocking toward classic inflation measures like gold and silver. In addition to record spec and fund long position readings in gold futures contracts, investors are also piling into gold and silver derivative instruments. That historically large investment flow seems to be justified by the combination of factors facing the markets. The US can hardly afford to see escalating interest rates as it takes on copious amount of new debt. Furthermore, some players are suggesting that a “Sub-prime II” debacle is waiting in the wings in the form of commercial real estate commitments or off resets on some residential variable rate loans.
Therefore, it is clear that keeping rates low is a situation that benefits the government and a large portion of the US economy, and that is probably enough to keep the Fed looking away from the initial inflationary signs in the economy. In the end, those commodities with favorable or decent fundamentals are destined to catch an aggressive lift in prices, while those commodities with neutral or slightly bearish fundamentals might see selling interest tempered.
