Interest Rate Roundup

Friday, August 08, 2008

Thoughts on the dollar and commodities

I'd be remiss if I didn't point out the REAL action in the markets right now (and frankly, for the past few weeks) is in currencies and commodities. The "sell dollars/buy gold/buy oil" trade has dramatically morphed into a "buy dollars/sell gold/sell oil" trade. In fact, the Dollar Index has risen the past six days in a row, with a massive (for the currency markets, anyway) 1.5% rise today. The euro dropped more than three full cents at one point, or 2.08%. That was the biggest one-day percentage move since September 6, 2000, according to Bloomberg. Oil futures prices are down to around $116 from a high of $147 and change, a decline of almost 21%.

Now, here's the $100,000 question -- is this "good" or "bad" news? On one hand, the falling dollar and falling commodities prices should bring down inflation (especially headline CPI) and give U.S. consumers a break at the gas pump. That's "good." It could also help stem the bleeding in industries that are on the ropes, like airlines and autos. Another "good" thing.

But plunging commodities prices could also put a real kibosh on some of the emerging market economies that have been diving growth the past few years. If, let's say for the sake of argument, Middle East oil wealth dries up, we're going to see fewer new islands showing up in the waters off Dubai -- and fewer record-setting skyscrapers going up on land, aren't we? Result: Multinational firms will get fewer orders for things like tractors and mega-cranes. That's "bad," isn't it?

Speaking of multinationals, many of them have been reporting strong profits because the euros, pounds, and other currencies they earn overseas translate into more dollars at earnings time. So they could actually get hit by a rising dollar. That's "bad" too, right?

Here's something else to chew on: One reason commodities prices are starting to plunge is that demand is tanking, right? Isn't that an indicator that we're headed toward a possible global recession, with the U.S. leading the way and economies in the Eurozone, the U.K., and elsewhere following suit? So how does that factor in? Could that mean that falling oil prices are, on net, a "bearish" signal on the global economy?

Those are the questions I'm pondering. How about you?


Post a Comment

<< Home

Site Meter