There is a view emerging in financial markets that the seven-year bear market in the U.S. dollar may be at an end. This view, if it can get some traction, would have big implications for commodity prices and Aussie resource shares.
A U.S. dollar rally would take some steam out of oil prices for sure. We don’t believe that commodity prices are rising only because the dollar is weak, but we reckon quite a few international traders do, and will use a dollar rally to pare back their long positions in commodity futures and resource stocks like BHP Billiton (ASX: BHP) and Rio Tinto (ASX: RIO).
In point of fact, commodities are rising because demand is rising faster than supply. However that fact puts the dollar rally story in doubt and thus will probably be ignored. Dollar bulls have taken heart from last week’s Fed statement. It may indicate (depending on how you read it) that rate cuts are on hold in the U.S. If the ECB cuts and the Fed stands pat, presto! You have a dollar rally (at least against the euro).
We have to admit, a mild dollar rally is not unimaginable. But let’s take a look at what the Fed actually said. Did it really reveal that its chief concern is now inflation and that it’s become hawkish? Hardly.
This is all the Fed said about inflation: “Uncertainty about the inflation outlook remains high. It will be necessary to continue to monitor inflation developments carefully.”
Yes. Yes, of course. “We’ll be keeping an eye on the inflation figures while we expand the money supply and take any sort of garbage collateral the banks can throw our way.” The great asset-laundering scheme continues.
Markets and Money