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Weaker Dollar Drives Stock Markets Higher

James Hyerczyk from ForexHound.com at 11/16/09


Stock markets surged on Monday after the U.S. Dollar Index fell to a new low for the year.  With the Dollar losing its appeal as a safe haven currency because of falling interest rates and deepening debt, investors have no choice but to sell the Dollar and seek better returns elsewhere. 


Treasury markets rallied sharply higher after a downward revision in September Retail Sales.  This news helped put in a bottom and generate a quick rally to the upside, but it was comments from Fed Chairman Bernanke that triggered a huge rally.  He reiterated the Fed’s FOMC statement that interest rates would remain low for a “prolonged period”.


The U.S. Dollar finished lower against all-major currencies today.  The down move was triggered by comments from highly ranking individuals including Fed Chairman Bernanke and a Chinese banking official.


Federal Reserve Chairman Bernanke said late Monday morning that the Fed is likely to keep interest rates exceptionally low for “an extended period.” These three words helped push the Dollar to a new low for the trading session.  He also stated that he is aware of the value of the Dollar, but indicated it would not be an issue unless it interfered with the Fed’s mandate to shore up employment and maintain price stability.  By not offering any support for the Dollar, he indicated that it was alright to continue lower.  Bernanke comments surprised some traders because the position of the Dollar is the concern of the Treasury and not the Fed.  


Overnight comments from an Asian-Pacific nation’s conference helped drive the Dollar lower.  Earlier the group pledged to maintain stimulus until there were signs of “durable growth”.  This served as a sign that liquidity in the global markets will continue until strong economic trends can develop.  Excess liquidity reduces the Dollar’s allure as a safe haven currency and increased demand for higher yielding assets.


In other news, the chairman of the China Banking Regulatory Commission said, “The continuous depreciation in the Dollar, and the U.S. government’s indication that, in order to resume growth and maintain public confidence, it basically won’t raise interest rates for the coming 12 to 18 months, has led to massive Dollar arbitrage speculation.”


He also added that the U.S. interest rate policy has “seriously affected global asset prices, fueled speculation in stock and property markets, and created new, real and insurmountable risks to the recovery of the global economy, especially emerging - market economies.”


All of these comments added up to a bad day for the Dollar as global investors continued to treat the low yielding greenback as a funding currency.


December Gold continued to march higher.  Some feel that a speculative bubble is forming because of the lack of inflation.  Others justify the rally because of the weaker Dollar and the fact that so much money has been pumped into the economy, thereby weakening currencies.


December Crude Oil reversed Friday’s loss on renewed speculative buying, higher equity prices and a falling Dollar.  Supply/demand fundamentals still remain bearish.  This could limit gains.  Furthermore, with the Fed looking for the economy to remain weak for some time, demand should continue to feel downward pressure. Look for a hard break if the Dollar begins to show strength.



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