Dollar set for a rebound; price reliefs may be on the way.
The dollar gained some ground on Friday against other major currencies for a number of reasons, and is headed towards its best monthly performance since 2005. With the Fed’s meeting this week expected to be the last talks of interest rate cuts for a while, investors began feeling a bit more confident about the American economy and its future, and it showed in their trading.
The dollar rose (or the euro declined) to $1.5630 per euro last week from $1.5817 last week. It isn’t necessarily expected to gain much ground this week as the last of the investors pull out of equity markets and dollar based securities in response to the possible rate cuts by the Fed, which will increase inflation even further. However, this is likely to be the last rate cut of the year as the Federal Reserve Board shifts their focus to fighting inflation and waiting to see if the tax rebate checks and other items in the economic stimulus plan will have the expected effects on the economy.
With most of the day traders who hold short term investments in equity securities finishing their sell offs this week, the dollar is likely to stabilize and even improve in the coming months. With an improving dollar, we will see something unfamiliar in the recent months: price declines in commodities.
Contrary to mainstream complainer’s talking points, the government (Democrats OR Republicans) does NOT set the price of commodities such as crude oil, rice, wheat and corn. Rather, the prices are determined in the free market by commodity investors. With the dollar dropping quite steadily in comparison to the Euro and other global currencies (an indicator of how strong the U.S. economy is doing in comparison to the other countries) over the last year, investors grew concerned with the future of the U.S. economy and especially investments backed only by equities or interest rates. Therefore, investors began shifting their money into more stable avenues that are always in demand, but have in the past shown slow growth: the commodities market.
Just like any stock on the stock market, when investors begin buying more of a commodity share than selling, the price increases. Crude oil is a very popular commodity, as it is always in demand. Therefore, as the dollar began to decline, investment monies shifted to oil. It has paid off well to be honest. With crude oil futures at $65 just a year ago, investors that bought into it at that price have received close to a 100% return on their investment, with oil closing at $118/barrel on Monday.
The same has held true for other commodities, such as wheat, corn, metal and poultry. Basically, investors shifted a lot of their money out of equity backed securities (i.e. mortgage securities, investment banks, hedge funds, etc) and traded the potential for large profits to slower growing commodities and a more certain growth.
With the dollar decline possibly flattening, and the expectation that many of the banks taking major losses and write down on their mortgage investments have taken the bulk of the losses, investors will likely move their monies back into dollar backed securities.
What does any of this have to do with you? With sell offs on the commodity market, prices for crude oil (which directly affect gas prices at the pump), wheat, corn and rice will likely decline to more manageable levels and will provide relief at the pump and the grocery store. With the dollar improving, it may also lead to interest rate increases on savings accounts, mutual funds and CD’s.
While the end of our economic slowdown is not over, or necessarily anywhere close, this would signal the first step in the right direction. If investors show interest in returning their capital to the markets that can help further the strength of the economy rather than force higher prices on everyone, then that can pave the way for more improvements that could encourage saving (which is at an alarmingly low rate) and the stability of the market.