Best of the Week
Most Popular
1. US Housing Market House Prices Bull Market Trend Current State - Nadeem_Walayat
2.Gold and Silver End of Week Technical, CoT and Fundamental Status - Gary_Tanashian
3.Stock Market Dow Trend Forecast - April Update - Nadeem_Walayat
4.When Will the Stock Market’s Rally Stop? - Troy_Bombardia
5.Russia and China Intend to Drain the West of Its Gold - MoneyMetals
6.BAIDU (BIDU) - Top 10 Artificial Intelligence Stocks Investing To Profit from AI Mega-trend - Nadeem_Walayat
7.Stop Feeding the Chinese Empire - ‘Belt and Road’ Trojan Horse - Richard_Mills
8.Stock Market US China Trade War Panic! Trend Forecast May 2019 Update - Nadeem_Walayat
9.US China Trade Impasse Threatens US Lithium, Rare Earth Imports - Richard_Mills
10.How to Invest in AI Stocks to Profit from the Machine Intelligence Mega-trend - Nadeem_Walayat
Last 7 days
IBM - Investing in AI Machine Intelligence Stocks - 25th May 19
Seasonal Dysfunction: Why Generations of Gold and Silver Investors Are Having Such Difficulty - 25th May 19
Employment - The Good and the Bad of Job Automation - 25th May 19
Gold Mining Mid-Tier Stocks Fundamentals - 25th May 19
Buy This Pick-and-Shovel 5G Stock Before It Takes Off - 25th May 19
China Hang Seng Stocks Index Collapses and Commodities - 24th May 19
Costco Corp. (COST): Finding Opportunity in Five Minutes or Less - 24th May 19
How Free Bets Have Impacted the Online Casino Industry - 24th May 19
This Ultimate Formula Will Help You Avoid Dividend Cutting Stocks - 24th May 19
Benefits of a Lottery Online Account - 24th May 19
Technical Analyst: Gold Price Weakness Should Be Short Term - 24th May 19
Silver Price Looking Weaker than Gold - 24th May 19
Nigel Farage's Brexit Party EU Elections Seats Results Forecast - 24th May 19
Powerful Signal from Gold GDX - 24th May 19
Eye Opening Currency Charts – Why Precious Metals Are Falling - 23rd May 19
Netflix Has 175 Days Left to Pull Off a Miracle… or It’s All Over - 23rd May 19
Capitalism Works, Ravenous Capitalism Doesn’t - 23rd May 19
The Euro Is Bidding Its Time: A Reversal at Hand? - 23rd May 19
Gold Demand Rose 7% in Q1 2019. A Launching Pad Higher for Gold? - 23rd May 19
Global Economic Tensions Translate Into Oil Price Volatility - 22nd May 19
The Coming Pension Crisis Is So Big That It’s a Problem for Everyone - 22nd May 19
Crude Oil, Hot Stocks, and Currencies – Markets III - 22nd May 19
The No.1 Energy Stock for 2019 - 22nd May 19
Brexit Party and Lib-Dems Pull Further Away from Labour and Tories in Latest Opinion Polls - 22nd May 19
The Deep State vs Donald Trump - US vs Them Part 2 - 21st May 19
Deep State & Financial Powers Worry about Alternative Currencies - 21st May 19
Gold’s Exciting Boredom - 21st May 19
Trade War Fears Again, Will Stocks Resume the Downtrend? - 21st May 19
Buffett Mistake Costs Him $4.3 Billion This Year—Here’s What Every Investor Can Learn from It - 21st May 19
Dow Stock Market Trend Forecast 2019 May Update - Video - 20th May 19
A Brief History of Financial Entropy - 20th May 19
Gold, MMT, Fiat Money Inflation In France - 20th May 19
WAR - Us versus Them Narrative - 20th May 19
US - Iran War Safe-haven Reasons to Own Gold - 20th May 19
How long does Google have to reference a website? - 20th May 19
Tory Leadership Contest - Will Michael Gove Stab Boris Johnson in the Back Again? - 19th May 19
Stock Market Counter-trend Rally - 19th May 19
Will Stock Market “Sell in May, Go Away” Lead to a Correction… or a Crash? - 19th May 19
US vs. Global Stocks Sector Rotation – What Next? Part 1 - 19th May 19
BrExit Party EarthQuake Could Win it 150 MP's at Next UK General Election! - 18th May 19
Dow Stock Market Trend Forecast 2019 May Update - 18th May 19
US Economy to Die a Traditional Death… Inflation Is Going to Move Higher - 18th May 19
Trump’s Trade War Is Good for These 3 Dividend Stocks - 18th May 19
GDX Gold Mining Stocks Fundamentals Update - 17th May 19
Stock Markets Rally Hard – Is The Volatility Move Over? - 17th May 19
The Use of Technical Analysis for Forex Traders - 17th May 19
Brexit Party Set to Storm EU Parliament Elections - Seats Forecast - 17th May 19
Is the Trade War a Catalyst for Gold? - 17th May 19
This Is a Recession Indicator No One Is Talking About—and It’s Flashing Red - 17th May 19
War! Good or Bad for Stocks? - 17th May 19
How Many Seats Will Brexit Party Win - EU Parliament Elections Forecast 2019 - 16th May 19

Market Oracle FREE Newsletter

U.S. House Prices Analysis and Trend Forecast 2019 to 2021

Ben Bernanke Puts Markets on Notice that US Dollar Will Be Defended

Currencies / US Dollar Jun 04, 2008 - 03:04 PM GMT

By: Adrian_Ash

Currencies

Best Financial Markets Analysis Article"...Ben Bernanke's speech in Barcelona this week hardly marks a new strong Dollar policy..."

BEN BERNANKE put the wind up Dollar bears, Gold bulls and just about everyone else in the currency markets for a whole hour on Tuesday.


The Dollar's decline, explained the Fed chairman, could accelerate the rate of inflation inside the United States .

That startling insight that won't win him any Nobel awards for economics this year. But the broad pundits' reaction deserves a Pulitzer prize for fiction.

"[Bernanke is] putting the market on notice that the Dollar has begun to reach a level that may be uncomfortable for the Fed," reckon the egg-heads at Goldman Sachs.

"The policy debate is starting to shift," agrees John Kemp at Sempra Metals, "and the speech looks like an effort to draw a line against both further Dollar weakness and any renewed escalation of either commodity prices or inflation."

"Not since the days of the Louvre Accord more than 20 years ago," adds a Greenwich hedge fund economist, "has the Fed made an explicit stand against the weakness of the Dollar."

The Fed's taking a stand? Bernanke will find he's missing more than a leg if he hopes to stand by the "strong Dollar" comments he made in Barcelona this week. All he managed, in fact, was a flat contradiction of what Fred Mishkin claimed on behalf of the Fed only nine weeks ago.

"The correlation between consumer price inflation and exchange rate changes is now very low in most industrial countries," said the (now ex-)Fed member at that March conference in Oslo, Norway. Back then, however, the Dollar was hurtling towards fresh all-time lows against Gold , the Euro, crude oil and most of the world's key food-stuffs.

Whereas on Tuesday this week, reassuring US consumers about the finer points of "pass-through" was no longer so urgent. So instead the Fed chairman set out to draw a "line in the sand" and put a halt to the Dollar's decline. Or so say the rag-bag of economists, financial hacks, pundits and forex traders picking their way through his words like some Roman divine picking at the guts of a dove.

Poke at the poor bird's innards long enough, and they can read pretty much whatever they want into the Fed chairman's speech – even the cold fact of the Dollar's near-40% drop since 2002.

"Bernanke has finally admitted the central bank's cheap money and cheap Dollar policy is partly responsible for fuelling the rise in commodity prices," believes Kemp for Sempra Metals.

"And what that also means, of course," reckons Tom Petruno in the LA Times , "is that the Fed is highly unlikely to cut interest rates further. Bernanke strongly hinted as much."

Oh really?

"For now," said the Fed chairman in fact, "policy seems well-positioned to promote moderate growth and price stability over time." And while he's wrong on both counts (or so we think, here at BullionVault ) all he really hinted at is a refusal to hike rates for a long time to come.

Leaving the Fed funds rate at 2.0% will leave the returns paid to cash way below zero after you account for inflation.

Tell me – just where's the Dollar bull market in that?

"With interest rate futures now pricing in a 98% probability of the Fed holding rates constant this month," said today's note from Standard Bank in Johannesburg , "plus a 30% probability of increasing rates by 25 basis points in October, we see the Dollar well supported in the near term.

"That could further contain near-term precious metals demand."

That one-in-three chance of the Fed raising rates to a massive 2.25% in Oct. hardly marks the end of the Dollar's decline today. Nor does the Dollar's decline need to keep rolling, in fact, for precious metals like Gold to keep rising.

The Dollar made a rally during 2005, gaining 7% on the foreign exchanges. The price of gold, meantime, rose 17% vs. the greenback itself.

Also notice how the declining Dollar didn't decline at all for 29 months starting in November 2004. And over that period Gold rose 54% for US investors and savers.

Finally take note that three-quarters of the Dollar's losses so far had already come before Ben Bernanke slashed US interest rates to 2% – taking the real returns paid to cash way back below zero – so that the big New York banks could borrow emergency funds at sub-market rates starting last August.

Quite what the Fed's negative real rates will achieve for the US economy in 2008 remains to be seen. Strong credit growth – boosting domestic demand and thus imports and house prices – might just fail to revive.

But a strong Dollar and weak gold? Thanks to sub-zero returns to cash?

Never happened before. But hey – who knows what the pundits will make of 2% interest chasing 4% inflation in prices?

By Adrian Ash
BullionVault.com

Gold price chart, no delay | Free Report: 5 Myths of the Gold Market
City correspondent for The Daily Reckoning in London and a regular contributor to MoneyWeek magazine, Adrian Ash is the editor of Gold News and head of research at www.BullionVault.com , giving you direct access to investment gold, vaulted in Zurich , on $3 spreads and 0.8% dealing fees.

(c) BullionVault 2008

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.

Adrian Ash Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules