US Dollar Hits New Record low
US Dollar Slide
Continues
The US dollar index hit a new record low
this morning after the release of benign US inflation data. The dollar
index (DXY) traded at 78.02, down 0.4% on the day. The index, which values
the dollar against a trade weighted basket of six major currencies, has
fallen 3.4% since the beginning of the month. September has been the worst
month for the dollar in the past 2 years and, after today's data, further
US dollar weakness is expected as it is becoming more likely that the
Federal Reserve will cut interest rates another 50 basis points in
October. The US dollar will continue to fall so long as the Fed is
engaged in monetary easing. The sense in the market right now is that the
Fed has abandoned the dollar and is prepared to accept a much lower
currency as the fallout from the very weak real estate and consumer
sectors. We are seeing a repeat of the tactics used from 2001 through 2004
when the Fed lowered interest rates aggressively after the tech market
meltdown and 9/11. During that period, the US dollar fell just over 30%.
We are starting from a much lower level for the dollar today of course,
and although no one would suggest the dollar will fall another 30%, we
have to accept that the dollar is the US economy's sacrificial lamb and
there is further depreciation to come until the Fed sees signs of a bottom
to the real estate "crash".
The Euro is now trading at a new high
above 1.42 for the first time ever. The Australian dollar is the other
currency up sharply today. Trading over .8850 the Aussie dollar is now
back to its mid-July highs having rebounded 15% over the past two months.
Expectations are that we'll likely soon see a new AUD high, and it would
not be a surprise if this is the next currency to take a run at USD
parity.
Canadian Dollar at
2-Week High
The Canadian dollar has jumped about
50 basis points to its highest level in 10 days due to the US dollar
weakness this morning. As this is very much a sell USD day, the market
shrugged of a slightly weaker than expected Canadian July GDP report.
Canada's economy grew by 0.2% in July vs the 0.3% forecast by analysts. A
slow down in oil and gas production provided the main drag during the
month. Goods sector production declined 0.1% largely due to a 1.4% drop in
oil and gas production. Energy tends to be a volatile sector - production
surged 2.4% in June following three straight monthly declines. Utility
output contracted 1.2% in July due to weather effects and the service
sector grew 0.3%. GDP increased at an annual rate of 3.4% in Q2 and
although it might be expected to weaken somewhat due to the dollar's
impact on slowing exports, the balance of the year should see robust
economic performance as strong domestic demand offsets weakness in the
export sector. Canadian consumers are feeling rather flush given rising
real estate values (in the west at least), a buoyant equity market, still
very low borrowing rates, and a very strong currency. If Canadian
retailers can get their act together much of this new found wealth will
actually be spent here, rather than across the border.
Commodity Prices Surge
Gold has soared 1.4% on the US dollar
weakness this morning. December gold futures have traded above $750 and
spot gold is at $744. This is the highest gold has traded at since hitting
$850 in 1980.
Oil prices are up about 40 cents with
West Texas crude trading over $83, a $4 increase over the past few days.
Fund buying in response to US dollar weakness is cited as the main driver
of the current upward pressure on oil. Oil futures are being purchased as
a hedge against further USD weakness as there is an inverse correlation
between the US dollar and the price of oil.
Have a good weekend.
By Paul Lennox, CFA, Corporate Treasurer
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