The Wall Street Journal printed a trifecta of articles to day that seem to cry out for the dollar to lift its head out of the sludge. Coincidentally (or not), the dollar rallied for its biggest one-day gain in almost three weeks.
In “Uncertainty May Help Dollar“, analysts remind us that the economic recovery remains fragile and monetary policies have become more uncertain:
“The trading environment is too uncertain for investors to sharply ramp up their bets on a weaker greenback. The main reasons for the cautious stance: The pace of the recovery remains uncertain — the U.K.’s disappointing fourth-quarter data were just the latest reminder — while there is increasing uncertainty about the leading central banks’ stance on currencies and interest rates. With the euro-zone economy gradually improving, policy makers could become increasingly vocal about the need for action to halt the euro’s appreciation.”
We should duly note that the euro-zone has recovered even as the euro has soared, so it is not clear to me just how high is too high to bring that recovery to a screeching halt.
In “Yuan’s Fall Annoys the Neighbors“, we read about the plight of Asian countries such as Singapore, Malaysia, Thailand, Indonesia, and South Korea who have tried and failed to keep their currencies from rising against the U.S. dollar, and thus the Chinese yuan:
“The countries that compete with China are at a critical juncture. To stem the rise of their currencies against the yuan (and the dollar), central banks around Asia have in recent months been purchasing gobs of greenbacks and building their foreign reserves. And now those reserves are back up to precrisis levels…The won, the Singapore dollar, the baht and the ringgit have marched higher regardless of the billions of dollars spent by Asian countries buying U.S. dollars… [Singapore, Thailand, and Indonesia] have $720 billion in reserves. China has $2.27 trillion.”
The double-whammy with these massive reserves is that the value of the reserves falls along with the failing policies of currency intervention. In the meantime, the recovery in exports remains fragile. The article notes that the G20 never mentioned the issue of China’s currency, so the other Asian exporters will continue to hang by a thread. (Note well that criticizing China for pegging the yuan to the U.S. dollar invites swift criticism of the U.S. for allowing the dollar to continue to sink to new multi-month lows).
Finally, in “Doubts Rise On Copper, Aluminum“, we read that traders fear that stimulus programs and infusions of liquidity into the global financial system will soon end, bringing the prices of commodities like copper and aluminum crashing back to earth. Traders and analysts quoted in this article insist that the rise in prices is not supported by fundamentals (of demand), just easy money that encourages stockpiling. This contradicts the increasing bullishness of some companies in this sector. For example, Bucyrus International (BUCY) just last week claimed that copper prices will remain elevated as miners struggle to ramp production and real demand slowly recovers.
Regardless, no matter what other central banks do, it is the monetary policy of the U.S. that will likely drive the next direction for commodity prices. The people quoted in this article must think that the dollar is about to rally and/or the Federal Reserve is getting ready to raise rates. I will believe that when I see it!
Be careful out there!
Full disclosure: long Alcoa calls