A huge week for the greenback
Today's Financial News - Posted October 9, 2009
The numbers may not show it, but it was a huge week for investors. As the dollar weakens, a whole host of things are happening behind the scenes. The trading opportunities are enormous.
By Andrew Snyder, TodaysFinancialNews.com
Baltimore – (TFN): This week, it was all about the dollar. The weaker it gets, the stronger the trading potential.
The falling dollar was fantastic news for gold bugs. In fact, almost the entire commodities complex benefited from a weaker greenback. The one notable exception was natural gas. With an immense supply glut and little international trade, the abundant fuel was the one major commodity to decline in value.
Even the equities market managed to shrug off America’s declining economic superiority, surging ahead on a surprisingly strong earnings report from Alcoa (NYSE:AA) and an investment community that is trying to dump its cash stockpile before it declines in value any further.
The big question looking forward is will the buck’s decline continue? Is it soon going to take $1.50 to buy a euro?
There is evidence for both sides of the argument today.
If the Asian countries that depend on a strong dollar to increase their export profits get their way, the greenback will turn around and strengthen once again.
Just to make sure the decline does not get out of hand, central banks from Hong Kong, Singapore, Taiwan, Thailand and Malaysia are increasing their buying of American dollars.
But how long can they swim against the current? Once they throw in the towel, there may not be many buyers left.
Proof of lack of demand comes from the long-bond market. During yesterday’s 30-year bond auction, the high yield rang in at 4.009, higher than was expected, even with a 2.71 bid-to-cover ratio.
These figures mark a sharp turnaround from last week’s five-month low rate of 3.89% reached after a dismal employment figure.
Fickle, fickle market
The action is starting to show the markets growing expectation of an interest rate hike. With Australia raising its key rate, bond traders are bracing for more surprises over the next few weeks. They don’t want to be caught with a horde of low-coupon bonds when rates begin to heat up.
Really, bond rates and commodity prices are not the independent variables. They are dependent on one thing: government spending.
As the nation’s deficit swells to historic levels, it won’t matter what interest rate Uncle Sam promises. If he can’t pay back his loans with money that is worth more than the paper it is printed on, nobody will be willing to lend.
What investors need to watch more than any index is Washington’s spending plans. The more they spend, the weaker the dollar in your wallet.
With hints of a second stimulus, a possible jobs-creation package and increased spending in Afghanistan and possibly Pakistan, get ready to see the already enormous deficit grow some more.
When it does, the dollar will fall.
Keep buying those commodities. We are just getting started.
Next Article: TFN eNews 10/09/2009: Our Top 3 Penny Stocks
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