Weaker Dollar Sends Gold to All−Time High

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

December Gold rallied to a new all-time high because of the weaker Dollar.  Now that this market has pierced the $1100 barrier with conviction, look for this price to become short-term support.

Last week’s bearish unemployment report pressured December Crude Oil because of supply concerns, but the overnight rally in equities and the Euro are helping to give this market a boost this morning.  Speculators are also betting that a hurricane near Louisiana shuts down refineries. This action would tighten up gasoline supplies.

Demand for higher risk assets is helping to trigger a strong rally in U.S. stock markets.  Although the markets are still below their highs for the year, appetite for risk is expected to continue for some time which gives the indices plenty of time to attack the major highs.  The action by the Fed last week combined with bearish unemployment report is expected to keep pressure on interest rates which is helping investors build confidence in the long side of the market.

Interest rate futures are under pressure this morning.  Increased supply from this week’s Treasury auction is helping to attract selling pressure.  The stronger stock market is encouraging treasury traders to shift money into higher yielding assets.

The U.S. Dollar is getting trounced overnight after the G-20 finance ministers failed to discuss the value of the Dollar, thereby, effectively offering no support.  In addition, they decided to keep stimulus measures in place until the global economy can show sustained gains.

The real selling pressure hit the Dollar after an IMF report issued at the meeting said, “the Dollar has moved closer to “medium-term equilibrium” but “still remains on the strong side.”  This statement was a shot at the Dollar being overvalued versus the Asian currencies particularly the Chinese Yuan.  Aggressive traders seized this moment as an opportunity to increase selling pressure on the Dollar.

The fact that the G-20 Finance Ministers failed to talk up the U.S. currency came a few days after the Federal Reserve voted to leave interest rates at historically low levels, and it was reported the U.S. lost more jobs while boosting the jobless rate to a 26-year high. All of this added up to a perfect storm versus the Dollar.  The Fed decision itself added up to a free ride for the Dollar bears until the Fed meets in December.  With interest rates at historically low levels and plenty of liquidity available, traders should continue to treat the Dollar as the world’s funding currency throughout the foreseeable future. 

Higher than expected German Industrial Production in September is giving the December Euro an additional boost.  The Euro chart indicates the main trend is up and within striking distance of the October high at 1.5062.

The CFTC Commitment of Traders Report on British Pound futures showed a major reduction in the number of short contracts. This is a sign that traders are shifting back toward demanding higher risk assets.  It is also a sign that traders may believe the U.K. economy is stabilizing.  Overnight the December British Pound took out the October high at 1.6689 and now appears ready to challenge the July top at 1.7043.

Global demand for higher yielding currencies is keeping pressure on the U.S. Dollar and Japanese Yen.  The December Japanese Yen is up slightly however as the Yen still maintains a slight interest rate advantage.  Technically, the Yen is trading inside of a retracement zone at 1.1164 to 1.1101.

Demand for higher yielding currencies is fueling a rally in the December Swiss Franc.  Last week the main trend turned up in this market.  With upside momentum building, don’t be surprised if this pair returns to the high for the year at .9971.

Last week’s bearish Canadian unemployment report helped weaken the December Canadian Dollar which may be why this currency is not participating in a big way in today’s flight to higher risk assets rally.  The chart pattern suggests that this market could accelerate to the upside if last week’s high at .9439 is violated.  .9458 is the first upside objective.  This is followed by a retracement level at .9505.