Week-in-Review: The Dollar, The Euro and Base Metals Walk Into a Bar…. One Ducked

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The new year in metals has already been marked by steep dives in commodity prices, and major changes in the status quo, so why should week three be any different?

Don’t miss this free download of our Monthly MMI® Report, covering price trends in 10 metals markets.

But this week’s story wasn’t about falling commodity prices or the price of oil and how it’s dragging its commodity brethren down. It was, instead, the week of central banking reaction and currency coming back to the fore. Sit back for MetalMiner‘s money market manipulation maelstrom.

Kneel Before the US Dollar!

Lead Forecasting Analyst Raul De Frutos wrote about how the dollar is going nowhere but up and the dollar index just hit an amazing 11-year high this week. Commodities, in turn, hit their lowest levels since 2009, but that’s old news by now. The bigger takeaway was that foreign currencies are now depreciating heavily against the strong dollar.

US Dollar Index since 2000

US Dollar Index since 2000. Source: MetalMiner.

How governments react to their falling currencies could cause major shifts in commodity prices. So, how ARE those governments and central banks responding?

ECB Goes on Bond-Buying Spree

With stimulus, of course! The European Central Bank, this week, announced a program to buy bonds after the euro fell to its lowest level in years. The bond buying total surpassed estimates faster than you could say “quantitative easing.”

The ECB will buy €60 billion ($69 billion) of public and private sector debt a month, starting in March 2015 and continuing until September 2016. Although the introduction of a bond-purchasing program was widely expected, analysts and investors said the size was toward the upper end of expectations. Hard currencies such as gold perked up on the news.

When asked if this would hurt the euro and maybe bring it into parity with the dollar, Italy’s Prime Minister,  Matteo Renzi, gave a nonchalant shrug and said he hoped it would happen.

“My dream is parity (between the euro and the dollar),” Renzi told the Wall Street Journal this week. Sure, a drop in the euro would provide a boost to Italy’s export sector but it flies in the face of other euro partners, such as Germany, who have backed a strong euro and criticized the bond-purchasing plan.

Editor-At-Large Stuart Burns sagely noted that the other benefit of a lower euro is that it will increase inflationary pressures as imports become more expensive in euro terms. It seem strange, suggesting a rise in inflation could be beneficial, but in Europe, Burns wrote,  “they are on the verge of deflation with consumer prices falling to a rate of just 0.1% in December prompting real fears of a deflationary spiral.”

Lower export prices would help Italy and other Southern European states. Renzi also added, “Germany against the rest of the world – this could be a mistake.”

Ouch… that’s not very friendly.

The State of the Manufacturing Union

Meanwhile, back here in the US, the economy is rolling full steam ahead. New housing construction is hitting highs not seen since 2005 and the overall economy is a virtual embarrassment of riches. Yet the soaring GDP and growing-faster-everyday energy sector are masking some structural problems. This week, President Barack Obama gave his State of the Union address to congress and the rest of us. He didn’t mention the still-struggling manufacturing sector at all.

Luckily, Managing Editor Taras Berezowsky was able to obtain the manufacturing-focused address that got left on the cutting room floor. It’s not what you might think.

So, that was the week in money and government/central banking policy. We hope you learned a few things about dollars, euros, State of the Union addresses and home improvement. We sure did.

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