News
Dollar rises 5% in a month as commodity prices decline
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One of the biggest news emanating from the financial world recently is that commodity prices have taken a plunge and the dollar seems to be on the road to recovery. The currency rose against the pound for the 11th consecutive day on Friday, to $1.85 – its longest winning streak in 37 years.
In July, one pound would buy two dollars. At the same time, the dollar climbed to its strongest level in almost six months against the euro, which fell to $1.47. In the past month alone the greenback has risen by nearly five per cent against the euro. Dollar was near a seven-month high versus the yen.
With a cautious stance towards global growth and less concern about inflation, equity fund managers have increased their dollar overweight positions. Similarly, debt managers also continue to increase long exposure to the dollar, says a recent Merrill Lunch currency report.
"The dollar strength seen in recent weeks has been significant. The most recent move has been a confluence of increasing concern surrounding global economic growth, lower commodity prices, a market short dollar and the breaking of significant key levels in a range of currencies. We believe the move is likely overdone. But with nothing too significant on the economic data calendar or central bank speeches in the near term, increasingly crowded long-dollar positions by fund managers could become a trigger if dollar accumulation continues," says Parag Ramaiya, FX Strategist at Merrill Lunch.
Commodities, on the other hand, did not fare well. Oil fell to its lowest price in three months, going briefly below $111 a barrel on Friday and closing at $113.77 in New York trading after the dollar muscled higher and Opec predicted the world's thirst for fuel next year will fall to its lowest point since 2002.
Even gold, which scorched into the record books earlier this year, seemed to have lost its lustre. Prices of the yellow metal, which touched $1,000 an ounce for the first time in March, have plunged and on Friday tumbled below $800 for the first time since late last year. It has been a reversal for a bellwether of the commodities boom that only months ago seemed poised to soar to uncharted heights.
Over the past six weeks, the price of crude has fallen nearly 22 per cent. Prices for other commodities, including copper and corn, have also fallen. The price of gold is down about 18 per cent over the past five weeks. With gold at $786.20 per ounce (mid-day Saturday), speculations are rife this is perhaps the end of the commodity bubble.
While the fundamentals backing commodities are positive, the price rally in recent months certainly seems overdone and due for a slight correction, believe analysts. According to French veteran, Christian Cambier, founder of French boutique Prigest, stock markets are set for a turnaround on the back of a strengthening dollar and weakening commodity prices. "I think we have a change occurring. Oil is down, the dollar is up. This is a relief for the market and could be a turning point," he was quoted by the media.
In an earlier report titled 'Demand Demolition', Lehman Brothers had predicted the prices of crude to average $110 per barrel in the fourth quarter of 2008, while maintaining it could decline to $90 per barrel by the first quarter of 2009.
"Last summer's price fall was accompanied by a drawdown in inventories and was short-lived; this summer we expect inventories to build and prices to trade range-bound for a while, before falling again in quarter four this year and quarter one next year," it said in a new report.
In the past 12 months there has been a drawdown in US crude inventories: a few weeks ago, the deficit to last year stood at over 55mn bbls before strong summer Middle East power generation requirements depleted 2007 stocks. But in recent months, US crude oil stocks have fallen more because of a lack of credit than a lack of oil and inventory in China, while difficult to track, are likely building, said the report.
Initially, the International Energy Agency (IEA) had projected demand growth in 2008 at 2.1m b/d with 750k b/d coming from the OECD. Now, the agency sees the OECD in decline by almost 500k b/d and has moderated its overall outlook to less than 900k b/d in 2008. That means global growth of a mere 900k b/d.
Historically, crude oil prices have tended to peak in October, reflecting seasonal bullish market forces and depleting stocks: peaking US gasoline demand, North Sea maintenance, and recently, Middle East power generation. However, this year, factors point to an early easing of prices. US gasoline demand peaked around May 26 and the Olympics have eased China's precautionary incentive to build stockpiles, say Lehman Brothers. "We judge fundamental looseness is already emerging. True, there remains a tail risk that hurricanes or political disruptions could create a crude oil spike in the near term."
However, neither the hurricanes in Gulf of Mexico nor a conflict between Georgia and Russia that had implications for the transport of Caspian oil, stopped oil's price fall. Though tropical storm Edouard churned through the heart of the Gulf of Mexico's oil-and-natural-gas industry, it left production unscathed and energy markets unimpressed.
Industry analysts said the market's low-key reaction to Edouard emphasised the shift in traders' attitudes. "Inearly July, when oil prices closed above $145 per barrel and seemed poised to go higher, even a minor storm in the Gulf of Mexico could have sent prices skyrocketing," Subash Chandra, an energy analyst with Jefferies & Co, was quoted in Wall Street Journal. Moreover, Saudi Arabia again appears to be playing the role of swing supplier, pumping 500k b/d more than three months ago. Additional Saudi fields promise 1.5m b/d more production in 2009. Even non-Opec supply additions under way must result in inventory builds of 1.4m b/d in H2 2008, says Lehman Brothers.
Coming back to precious metals, gold's fall underlines a reducing appeal of the metal as an alternative investment to US assets. "Oil, gold, copper and corn have plunged from records this year as the dollar strengthened and concern mounted that slower global economic growth will cut demand for raw materials. Silver and platinum have also tumbled amid increasing expectations the Fed won't cut interest rates [any more]," says Bloomberg.
As commodity prices are falling, many market participants are betting they will fall further. "It's not just the speculators. Banks, brokers and consumers are all alert to weakening global macro-economic fundamentals and becoming bearish," said Dow Jones. "Long positions are not worth the risk," Kevin Norrish, director of commodities research at Barclays Capital in London, was quoted by Dow Jones.
The recent Dow Jones-AIG commodity data shows a decline in daily performance as of August 12 by 8.2 per cent on the month and 19.6 per cent on the quarter. July saw the largest decline in returns for the Standard & Poor's GSCI index of 24 commodities since March 2003, Morgan Stanley said in its commodity index report.
Strong dollar can tame inflation
The US dollar's continued upward march in the recent weeks could lead to a dampening in the imported inflation seen in the GCC countries, analysts believe. Just a couple of months ago, policy makers were alarmed about how far the dollar had fallen. Now evidence is building that its seven-year slide may be ending.
"It [the dollar's continue rise] will obviously mute the growing chorus of experts urging GCC central bankers to depeg from the greenback," a Dubai-based currency analyst told Emirates Business. "But it is too early to assume that the dollar is only going to go up from here," he cautioned. When a currency strengthens, it's usually a sign of health in the underlying economy. In the current case, however, the dollar's rally is a sign of weakness in other economies, he explained.
Indeed, reports in recent days showed the economies of Japan and Europe contracted in the second quarter, and the UK slowed. This is perhaps a clear sign that the ills afflicting the US economy are now spreading.
The dollar's latest rise is closely tied to recent declines in oil and other commodity prices. As economies in the rest of the world slow, demand for raw materials appears to be waning, which is taking pressure off commodity prices. These goods are typically priced in dollars. As the US currency strengthens, commodity producers have less incentive to raise their prices, easing the upward pressure on prices.
The development has wide-ranging implications for financial markets and the global economy. It may have a positive impact on global equity markets, with confidence making an eventual comeback. It is also good news for central bankers worried about the upward drift of inflation, particularly in the US and regions with a dollar-denominated currency, such as in the GCC.
However, there could be plenty of negative fallout from the currency's unexpected turn, said the currency analyst. Hedge funds that trade currencies, oil, gold and other commodities could feel the effects right away.
In July, one pound would buy two dollars. At the same time, the dollar climbed to its strongest level in almost six months against the euro, which fell to $1.47. In the past month alone the greenback has risen by nearly five per cent against the euro. Dollar was near a seven-month high versus the yen.
With a cautious stance towards global growth and less concern about inflation, equity fund managers have increased their dollar overweight positions. Similarly, debt managers also continue to increase long exposure to the dollar, says a recent Merrill Lunch currency report.
"The dollar strength seen in recent weeks has been significant. The most recent move has been a confluence of increasing concern surrounding global economic growth, lower commodity prices, a market short dollar and the breaking of significant key levels in a range of currencies. We believe the move is likely overdone. But with nothing too significant on the economic data calendar or central bank speeches in the near term, increasingly crowded long-dollar positions by fund managers could become a trigger if dollar accumulation continues," says Parag Ramaiya, FX Strategist at Merrill Lunch.
Commodities, on the other hand, did not fare well. Oil fell to its lowest price in three months, going briefly below $111 a barrel on Friday and closing at $113.77 in New York trading after the dollar muscled higher and Opec predicted the world's thirst for fuel next year will fall to its lowest point since 2002.
Even gold, which scorched into the record books earlier this year, seemed to have lost its lustre. Prices of the yellow metal, which touched $1,000 an ounce for the first time in March, have plunged and on Friday tumbled below $800 for the first time since late last year. It has been a reversal for a bellwether of the commodities boom that only months ago seemed poised to soar to uncharted heights.
Over the past six weeks, the price of crude has fallen nearly 22 per cent. Prices for other commodities, including copper and corn, have also fallen. The price of gold is down about 18 per cent over the past five weeks. With gold at $786.20 per ounce (mid-day Saturday), speculations are rife this is perhaps the end of the commodity bubble.
While the fundamentals backing commodities are positive, the price rally in recent months certainly seems overdone and due for a slight correction, believe analysts. According to French veteran, Christian Cambier, founder of French boutique Prigest, stock markets are set for a turnaround on the back of a strengthening dollar and weakening commodity prices. "I think we have a change occurring. Oil is down, the dollar is up. This is a relief for the market and could be a turning point," he was quoted by the media.
In an earlier report titled 'Demand Demolition', Lehman Brothers had predicted the prices of crude to average $110 per barrel in the fourth quarter of 2008, while maintaining it could decline to $90 per barrel by the first quarter of 2009.
"Last summer's price fall was accompanied by a drawdown in inventories and was short-lived; this summer we expect inventories to build and prices to trade range-bound for a while, before falling again in quarter four this year and quarter one next year," it said in a new report.
In the past 12 months there has been a drawdown in US crude inventories: a few weeks ago, the deficit to last year stood at over 55mn bbls before strong summer Middle East power generation requirements depleted 2007 stocks. But in recent months, US crude oil stocks have fallen more because of a lack of credit than a lack of oil and inventory in China, while difficult to track, are likely building, said the report.
Initially, the International Energy Agency (IEA) had projected demand growth in 2008 at 2.1m b/d with 750k b/d coming from the OECD. Now, the agency sees the OECD in decline by almost 500k b/d and has moderated its overall outlook to less than 900k b/d in 2008. That means global growth of a mere 900k b/d.
Historically, crude oil prices have tended to peak in October, reflecting seasonal bullish market forces and depleting stocks: peaking US gasoline demand, North Sea maintenance, and recently, Middle East power generation. However, this year, factors point to an early easing of prices. US gasoline demand peaked around May 26 and the Olympics have eased China's precautionary incentive to build stockpiles, say Lehman Brothers. "We judge fundamental looseness is already emerging. True, there remains a tail risk that hurricanes or political disruptions could create a crude oil spike in the near term."
However, neither the hurricanes in Gulf of Mexico nor a conflict between Georgia and Russia that had implications for the transport of Caspian oil, stopped oil's price fall. Though tropical storm Edouard churned through the heart of the Gulf of Mexico's oil-and-natural-gas industry, it left production unscathed and energy markets unimpressed.
Industry analysts said the market's low-key reaction to Edouard emphasised the shift in traders' attitudes. "Inearly July, when oil prices closed above $145 per barrel and seemed poised to go higher, even a minor storm in the Gulf of Mexico could have sent prices skyrocketing," Subash Chandra, an energy analyst with Jefferies & Co, was quoted in Wall Street Journal. Moreover, Saudi Arabia again appears to be playing the role of swing supplier, pumping 500k b/d more than three months ago. Additional Saudi fields promise 1.5m b/d more production in 2009. Even non-Opec supply additions under way must result in inventory builds of 1.4m b/d in H2 2008, says Lehman Brothers.
Coming back to precious metals, gold's fall underlines a reducing appeal of the metal as an alternative investment to US assets. "Oil, gold, copper and corn have plunged from records this year as the dollar strengthened and concern mounted that slower global economic growth will cut demand for raw materials. Silver and platinum have also tumbled amid increasing expectations the Fed won't cut interest rates [any more]," says Bloomberg.
As commodity prices are falling, many market participants are betting they will fall further. "It's not just the speculators. Banks, brokers and consumers are all alert to weakening global macro-economic fundamentals and becoming bearish," said Dow Jones. "Long positions are not worth the risk," Kevin Norrish, director of commodities research at Barclays Capital in London, was quoted by Dow Jones.
The recent Dow Jones-AIG commodity data shows a decline in daily performance as of August 12 by 8.2 per cent on the month and 19.6 per cent on the quarter. July saw the largest decline in returns for the Standard & Poor's GSCI index of 24 commodities since March 2003, Morgan Stanley said in its commodity index report.
Strong dollar can tame inflation
The US dollar's continued upward march in the recent weeks could lead to a dampening in the imported inflation seen in the GCC countries, analysts believe. Just a couple of months ago, policy makers were alarmed about how far the dollar had fallen. Now evidence is building that its seven-year slide may be ending.
"It [the dollar's continue rise] will obviously mute the growing chorus of experts urging GCC central bankers to depeg from the greenback," a Dubai-based currency analyst told Emirates Business. "But it is too early to assume that the dollar is only going to go up from here," he cautioned. When a currency strengthens, it's usually a sign of health in the underlying economy. In the current case, however, the dollar's rally is a sign of weakness in other economies, he explained.
Indeed, reports in recent days showed the economies of Japan and Europe contracted in the second quarter, and the UK slowed. This is perhaps a clear sign that the ills afflicting the US economy are now spreading.
The dollar's latest rise is closely tied to recent declines in oil and other commodity prices. As economies in the rest of the world slow, demand for raw materials appears to be waning, which is taking pressure off commodity prices. These goods are typically priced in dollars. As the US currency strengthens, commodity producers have less incentive to raise their prices, easing the upward pressure on prices.
The development has wide-ranging implications for financial markets and the global economy. It may have a positive impact on global equity markets, with confidence making an eventual comeback. It is also good news for central bankers worried about the upward drift of inflation, particularly in the US and regions with a dollar-denominated currency, such as in the GCC.
However, there could be plenty of negative fallout from the currency's unexpected turn, said the currency analyst. Hedge funds that trade currencies, oil, gold and other commodities could feel the effects right away.