Financial Market

Other metals continued to weaken today following the trading trends showed with Gold in yesterday’s trading after the dollar continued to strengthen.

Copper most notably fell in line with other commodities in early trading after interest in base metals continued to curb amid optimised that the worst of the credit crisis was over.

With the dollar’s resurgence making dollar price commodities are made more expensive to potential investors with other currencies therefore reducing there appeal.

‘Going forward it does look as though the course of the dollar is going to be all-important for most of the metals,’ - RBC Capital Markets analysts.

After the FED .25% rate cut temporarily halted the dollars resurgence, it returned in European trading after the market concluded that the US had in fact turned the corner on the credit crunch after higher than expected consumer spending data was released.

Although demand for metal commodities is falling with the resurgence of the greenback, copper prices are yet to see a dramatic slide after industrial action in Chile, the world’s largest producer, had dented supply.

At the same time LME-monitored copper stocks have declined 450 tonnes to 110,075 tonnes.

This week Gold slumped to a three month low to $850 an ounce after the US dollar continued to show further signs of recovery against the Euro after increasing optimism that the worst of the global credit crisis is over.

The yellow mental that has seen record highs in recent months has slumped by $25 since reaching $881.65 overnight. This overnight high was brought as a result of a temporary stalling of the dollars resurgence after the FED made a further interest rate cut.

Since the FEDs rate cut the US economy has been filled with an air of cautious optimism that the worst of the financial crisis has been weathered, helping push the dollar upwards. As a result the price of gold has seen a steady decline as its appeal to an alternative to the greenback has been diminished.

“The pace of decline, suggests gold will remain at risk to further corrections in the coming sessions, potentially testing below the psychological $850 an ounce mark before finding sufficient demand from bargain hunters and the physical sector.” - James Moore at TheBullionDesk.com

Although many had predicted a .25% rate cut by the FED to 2.0%, many were surprised by statements suggesting that further cuts could follow, weakening the dollar. US interest rates have now fallen from 5.25% since September 2007.

On Thursday however core inflation was higher than expected which many expect will halt any further rate cuts planned by the FED.

The resulting rise in confidence in US markets has seen an increase in the appetite for risk, which has further pressured gold, with investors redirecting money ploughed into commodities at the start of the year back into equities. A trend much expected with gold’s reputation as a safe store for wealth in times of economic uncertainty.

Oil jumped above $107 a barrel today after the continued conflict in Iraq led to saboteurs blowing up one of the countries two major export pipelines. The attack came amid the third day of Iraqi military operations, targeted towards loyal fighters of the Shi’ite cleric Moqtada al-Sadr in the town of Basra in the southern Iraq.

The explosion marked the first time since 2004 that the southern Iraqi supply route has been disrupted.

“Crude exports will be greatly affected because this is one of two main pipelines transporting crude to the southern terminals, we will lose about a third of crude exported through Basra,” - Oil Company official

In last Friday’s trading a commodities sell off saw oil take a sharp fall to below $100 a barrel, after record highs of $111.80 seen last earlier in the week, but todays rise is a further extension on the $4 gains made yesterday after a report showed lower than expected petrol stocks in the US.

US crude was up 43 cents to $106.33 this afternoon, after peaking at $107.70 earlier in the day. Any gains that were to come on the back of increasing conflict in Iraq were limited by a strengthening dollar which also showed gains after the FED eased recession worries.

The dollar gains were also backed by figures released which showed US jobless benefit claims fell by 9,000, with the greenback managing to regain some lost ground. In early trading it saw a rise of 0.6% to %1.5757 against the euro and a rise of 0.9% against the Yen.

Earlier this month Iran’s President described the US Dollar as a ‘worthless piece of paper’ and at a time when speculative selling of the dollar reaching all time highs, Financial Market examine whether the days of the Dollar as a dominant international trading currency are numbered.

On the 11th of December the Pound rose against the Dollar for the forth consecutive day, creating speculation that the FED will cut interest rates subsequently reducing the attractiveness of Dollar assets further, in order to stave off a looming recession.

In additional news the FED has also announced a 0.25 point reduction marking the greatest easing of borrowing costs since the last recession in 2001.

It is not only against the pound that dollar is low, and across a range of world currencies the dollar has recently reached all time lows. This has gone as far as the currency losing a quarter of its value over the last five years against leading currencies. In one example at one point in 2002 the Euro was marked at 86 cents; today it buys $1.48.

The struggles of the Dollar have sent waves of scepticism throughout world markets, including several over hyped high profile cases when the Euro has been preferred to the Dollar. More realistically there are ongoing debates regarding Dollar dominated reserves being switched to alternate currencies in a similar trend to that of the Pound being replaced 50 years ago when Britain was the worlds greatest trading power.

Although currency values do ebb and flow there is an air of crisis with the current depreciation of the dollar due to the shear volume of reserves that are made up of a deprecating dollar assets. Foreign stockpiles have tripled since the beginning of decade holding $5.7 trillion Dollars and accounting for 65% of world wide stockpiles. The largest two single holders of dollar dominated assets are currently China and Japan holding 1.4 trillion and 1 trillion Dollars respectively.

The effects off holding Dollar dominated reserves over the past five years have meant huge financial loss to those countries, and countries are understandably itchy about how much more they can allow their reserve value to deprecate.

If speculation was true and foreign exchange reserves decide to dump the Dollar as a reserve currency cutting recent losses, it would result in a further slump of currency value. Therefore lure of selling first is also attractive to countries with large Dollar stockpiles as central banks are already overloaded with the currency, meaning those who abandon ship last may loose even more.

A falling Dollar is not a new scenario and America has staved off similar threats in the past, but with a slowing economy too, it makes the current situation even worse. The US housing downturn has had a negative effect on credit markets and the threat of a recession has led to two interest rate cuts, with more predicted. Slowed growth and falling interest rates make for a weakened currency in the Dollar, particularly when growth prospects elsewhere seeming more attractive.

To add to the Dollars woes there is also the threat of oil exporting countries ditching Dollars as the trading currency. This would have a severe impact on the Petro-Dollar cycle which has previously meaning oil trading states are obliged to buy Dollars in order to buy oil. Ditching the Dollar as the world’s oil trading currency would lessen its demand when confidence for the currency is already wavering.

Some experts have stated that here is in fact no reason why currency reserves should be dominated by a single currency. In essence reserves are a fall back, and are held to act as guarantor for a countries trading, reserves aren’t floated in global trading. As the main requirement is that the currency inspires confidence and is easily convertible, both the Euro and the Yuan are tipped to play a large part of financial reserves in the future.

More immediately the Euro Threatens the Dollar as it has additional present day advantages in terms of the reach of the currency and is share of world trade. The Euro only becomes more attractive as it stretches across so an increasing number of individual economies throughout Europe. Additionally the countries making up the euro are less dependent on oil imports than America is and sell more to oil exporters as well as to fast-growing economies such as China and Brazil.

In the short term the Euro looks an attractive substitute, and as huge Dollar dominated reserves are faced with fighting off the cost of US inflation it seems increasingly attractive. Sticking with the Dollar would mean importing the policies of America as she staves of a recession, but alternatively abandoning the Dollar completely would add to increasing pressure on the currency.

Whatever the future holds it is certain that Japan and China as the two largest holders of reserve Dollars will pave the way, and will be big players in avoiding a Dollar crash. As it stands Japan looks certain to stick with the Dollar. If China also retains it, recognising dumping the dollar would be self defeating as she owns such vast amounts of American assets, there may after all be some light at the end of the tunnel for America and the Dollar.