Business | Economy
Weaker commodities could be dollar's silver lining
A commodities selloff and consequent dollar rally proved short-lived last week but it shows that softer metals and oil prices may yet prove the silver lining for the US currency.
- Reuters
- Published: 00:17 March 27, 2008
London: A commodities selloff and consequent dollar rally proved short-lived last week but it shows that softer metals and oil prices may yet prove the silver lining for the US currency.
The greenback regained some ground against the yen yesterday after US new home sales in February fell by less than expected.
The dollar edged up to 99.20 from 99.05 before the data. The euro held gains against the dollar at $1.5727, up 0.6 per cent on the day.
The dollar suffers from expensive oil due to the high levels of energy consumption in the United States, while the loose US monetary policy in recent months has created an increased supply of the currency that overseas buyers need to pay for oil.
At the same time the euro and gold - and increasingly oil too - are seen as inflation hedges: the euro due to the European Central Bank's inflation-fighting focus; gold because it has long been a historical store of value; and oil because it has been a driver of rising consumer price inflation.
After setting record peaks on Monday last week - the euro above $1.59, gold above $1,000 an ounce and oil above $100 a barrel - all three retreated, with the move accelerating last Thursday.
That day, the 1.3 per cent sell off in euro/dollar was blamed on weakness in gold and oil prices, as investors cashed in on recent gains in these assets to shore up loss-making positions in other assets.
The subsequent recovery in the euro and gold suggests the selloff may have been exaggerated by investors adjusting their positions before the long Easter weekend in much of Europe and the US.
But analysts say the move could be a harbinger. "If the investment environment and margin calls were behind the commodity fall last week, we are betting that later in the year the macro story will really come through to bring oil down and maybe provide the dollar with a little bit of support," said Chris Turner, head of FX strategy at ING.
ING estimates that bullish bets on commodities account for at least five per cent of the gains in euro/dollar so far this year. Any reversal could lead to an equivalent fall in the currency pair, helping it to meet ING's year-end forecast of $1.50.
Since the start of 2007, euro/dollar's absolute daily correlation has averaged nearly 94 per cent with gold and 97 per cent with oil.
Both correlations are the highest among major currency pairs, and are even stronger than the links between currencies of commodity-producing countries and the respective commodities, such as the Norwegian crown for oil or Australian dollar for gold.
With around 27 per cent of the $3.2 trillion-a-day in global foreign exchange turnover involving trade between the euro and dollar, the move in euro/dollar is a good gauge of the greenback's overall strength - or weakness.
Analysts expect commodity prices to fall, not least because a US econ-omic slowdown is likely to have much wider repercussions, prompting global consumers to cut spending on everything from car trips to gold bracelets.
Oil is seen averaging $82.25 a barrel this year and $75.00 next year while gold is seen at $851.20 and $846.12 respectively, according to Reuters polls.
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