US Dollar Forecasts and Commodity Prices

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Macroeconomics

Are you like me and find yourself depressed reading all these articles about a potential US economic depression, the state of the stock market or falling home prices?

Besides writing more upbeat pieces (because the doom and gloom is well, rather depressing reading), we thought we would try to highlight some of the more interesting aspects of the current economic environment and how they may impact folks who source metals for a living. A couple of weeks ago, my learned colleague Stuart penned a piece on the significance of the US bail-out plan on the price of metals suggesting that metals pricing is more influenced by currency than supply (e.g. power shortages, natural disasters) and demand (or lack thereof). Since it’s easy to say things like “nothing kills high prices like high prices” or “what goes up must come down”, and yes, MetalMiner readers will remind me that I have said both of those phrases, it would be tempting to dismiss the notion that commodities are now in a long term toilet-like-funk.

We believe it’s too early to celebrate the death of high commodity prices. In fact, where the dollar goes – so too may commodities [inversely] follow. And though the dollar has been more buoyant in recent weeks, readers may want to pay heed to comments like this, “It’s unwise to buy a currency which is both in recession and having a banking crisis,” said Peter Pontikis, a treasury strategist at Suncorp-Metway Ltd. in Brisbane. The dollar will weaken to $1.45 per euro over the next month,” he said according to a recent Bloomberg article. The other factor which will play on commodities relates to interest rates, “Goldman Sachs Group Inc. said the U.S. economy will enter a recession “significantly deeper” than previously forecast, prompting the Federal Reserve to cut interest rates by at least 1 percentage point,” according to that same Bloomberg article. Cuts in interest rates also corrolate to higher commodity prices as one noted professor suggests.

As Mark Twain once said, “Reports of my death have been highly exaggerated,” proceed with caution!

–Lisa Reisman

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