The Dollar Again and Again

Published on: 17:41PM Dec 19, 2008
The chart of the week is the US dollar index. As noted in previous reports, the US dollar index soared during the late summer and early fall as the financial markets debacle gained steam. If you remember, a rising US dollar value is academically deflationary for commodities because it makes our products more expensive overseas. Most recently, however, we have experienced a dramatic shift of the trend of the dollar. The US dollar index moved 8% lower from December 3rd until December 17th. Why? Well, speculation is that it’s because of the trade anticipating the Fed lowering interest rates this month (lowering interest rates is bearish for the dollar). And the Fed did just that this week lowering interest rates to historic lows. But since the Fed has lowered interest rates guess what has happened? The dollar has moved modestly higher. Perhaps the trade “sold the rumor and bought the fact,” but the recent downturn in the dollar has spurred more of a focus on the expected impact of all the recent government actions to address the waning economy- A devalued dollar and inflation. Now a devalued dollar and inflation is generally inflationary for commodities but don’t worry I don’t think anyone believes we’re anywhere close to that yet. Of course, just 6 months ago it would have been hard to believe commodity prices would ever be where they are at today. 
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