Dollar's Tumble Gives Gold A Boost

Originally published: Investor's Business Daily

BY TRANG HO

INVESTOR'S BUSINESS DAILY

Posted 12/11/2008

A sharp drop in the dollar Thursday sent foreign currencies and commodities higher. The U.S. dollar index, which tracks the buck against six major currencies, fell as much as 1.8% to a six-week low of 83.60, as of Thursday evening.

PowerShares DB U.S. Dollar Index Bullish, (UUP) which tracks the greenback against the basket of currencies, gapped down 4% at the open but retraced half of its losses. It ended down 2.22% at 25.52. The ETF dropped below its 10-week moving average for the first time since late September.

Its opposite, PowerShares DB U.S. Dollar Bearish (UDN) leapt 1.6% to 25.81 in three times average volume, clearing its 10-week moving average.

CurrencyShares Canadian Dollar (FXC) and Euro Trust (FXE) both shot up 2.3%. CurrencyShares tracking the British pound, (FXB) Australian dollar, (FXA) Japanese yen, (FXY) Mexican peso, (FXM) Swedish krona (FXS) and Swiss franc (FXF) all fell 1% to 2%.

"The move today in addition to the move in the bond market indicates investors are getting more risk averse going into the end of the year," said Kathy Lien, director of currency research at GFT Forex. "The market is pricing in a deeper recession."

An expected rate cut at the upcoming FOMC meeting Dec. 15-16 could cause further depreciation in the greenback. Some economists say the Fed should cut interest rates less than the expected half point.

But Lien believes U.S trade, producer prices and retail sales numbers due out Friday will raise concerns that the U.S. recession is worse than what most believe and call for more aggressive Fed measures.

"The market is already pricing in a 75-basis point rate cut Tuesday, and the jobless numbers confirmed that the Fed will have to cut by no less than that," said Lien.

A rate cut to 0.25% would make the U.S. dollar the lowest-yielding currency in the developed market.

The Treasury market is already pricing in the possibility of deflation and depression with yields in zero- to-negative territory for the first time since the Great Depression, according to Lien.

Commodity Bull To Resume?

Commodities shot up across the board on safe-haven buying. And a weaker dollar makes products traded in the currency more expensive.

SPDR Gold Shares (GLD) rose 1% to 80.65, following a 4.5% jump Wednesday. The ETF rose above its 10-week moving average but is still below the 40-week line, which may be an area of resistance.

IShares Silver Trust (SLV) ticked up 0.79% to 10.20, spending a second day above its 10-week average. It has been trading in a sideways range between 8.45 and 10.67 the past two months. It could be forming a bottom after falling 50% from its high.

Lien projects gold will reach $850 an ounce, up 6%, by Tuesday and oil to spike to $55 a barrel, up 28%, within the month on further devaluation of the dollar.

Crude oil for January delivery jumped $4.46 to $47.98 Thursday. United States Oil (USO) leapt 7.74% to 38.58 on nearly 2 1/2 times usual trade. It trades deep below its 10-week and 40-week averages and has dropped 67% from its July high.

United States Gasoline, (UGA) which holds gasoline futures, soared 8.82% to 21.22 in four times average volume. Its chart looks similar to USO.

PowerShares DB Commodity, (DBC) which combines futures of crude oil, heating oil, gold, aluminum, corn and wheat, gained 3.03% to 21.40 in more than double usual trade. It's tumbled 54% from its July peak.

PowerShares DB Agriculture, (DBA) which holds futures contracts for corn, wheat, soybeans and sugar, edged up 0.38% to 23.58. It has fallen 45% from its 52-week high of 43.50. But it's closer to approaching its 10-week average than the other commodity ETFs.

"If the U.S. dollar (index) falls below 80 or returns to the 72 level, it will provide an excellent opportunity to buy a bull market in commodities at a discount," said Paul Kavanaugh, senior trader at PFGBEST.com.

Copyright 2000-2008 Investor's Business Daily, Inc.