Wednesday, March 08, 2006


Expected Fed Hikes Boost US Dollar

Some price movement in the precious metals. "April gold fell $12.50, or 2.3%, to $542 an ounce in afternoon dealings, after tapping a nearly three-week low of $540.60. Weaker crude-oil prices and strength in the U.S. dollar weighed on gold prices Wednesday, said Peter Spina, an analyst at And the session's action is feeding off the negative momentum from the past few trading sessions, he said. 'We are breaking supports and traders want out.' April gold lost $15.90 over the past three sessions."

"The Toronto stock market skidded more than 100 points Wednesday in a broad-based decline led by falling mining and energy stocks. U.S. markets also dropped as U.S. government bond yields rose, raising investor worries about interest rates. Toronto's S&P/TSX composite index was down 124.98 points at 11,691.48 with all sectors except real estate in the red. The junior TSX Venture Exchange declined 54.75 points to 2,537.4."

"The Canadian dollar was off 0.29 of a cent to 86.63 cents US after tumbling 0.81 of a cent Tuesday when the Bank of Canada hinted that interest rate increases may soon end."

"The gold sector was the biggest percentage decliner in Toronto, down 2.4 per cent, as the price of bullion also traded lower. The April bullion contract on the Nymex lost $10.60 to $543.90 US an ounce and Goldcorp Inc. lost $1.60 to $29.60 and Barrick Gold Corp. gave up 66 cents to $30.54."

"In the U.S., the yield on the 10-year Treasury note rose to 4.74 per cent from 4.73 per cent late Tuesday. Bond yields have recently been trading at their highest levels since June 2004.'

"U.S. investors are concerned that the Federal Reserve will continue to hike interest rates, which could make loans harder to get for consumers and businesses, slowing the economy. At the same time, higher rates can make bonds more attractive than equities, draining money away from stocks."

"Overseas, London's FTSE 100 index dropped 40.5 points to 5,816.9. Frankfurt's DAX 30 fell 47.4 points to 5,691.88 while the Paris CAC 40 declined 25.72 points to 4,966.49. Tokyo's Nikkei 225 index shed 98.53 points, or 0.63 per cent, to finish at 15,627.49 points on the Tokyo Stock Exchange. The Tokyo market has now fallen in five of the last six sessions amid growing expectations that the central bank will scrap its five-year policy of quantitative easing, which kept interest rates at zero and flooded the financial system with excess cash to spur borrowing."

"In Hong Kong, the blue-chip Hang Seng Index fell 109.27 points, or 0.7 per cent, to 15,493.09."

"Currency strategists are divided on how far the local currency will be driven down by speculation over a narrowing interest rate gap between Australia and the US. The Australian dollar sank to its weakest level in more than two months yesterday as foreign exchange dealers around the world switched to the greenback, believing there are impending rate rises in the US."

"During trade yesterday the dollar traded as low as US73.18c before closing at US73.43c, nearly 0.5 per cent lower for the session. Activity on global currency futures markets has seen traders hedge their bets that the US Federal Reserve will soon lift its benchmark borrowing rate beyond 5 per cent."

"Traders are speculating that the US Federal Reserve could lift rates to 5.5 per cent before the end of the year to rein in economic growth. Westpac senior international economist Huw McKay said that when combined with weaker commodity prices it was a recipe for the Australian dollar to be sold down."

"'There is also speculation the Bank of Japan will exit its unconventional monetary policy which supports the Australian dollar through extra liquidity in Japan,' he said. People expect the Australian dollar to fall, quite bluntly. By the end of the year we expect the dollar to be around US66c.'"

Pretty simple.

Rising interest rates = stronger US Dollar. Where else can these foreigners put thier money and make a guaranteed 4.75%. Soon it will be 5.25%

Funny, but I posted a similiar thing about two months ago in Bens HB2 blog and one of the wannabe economists in there lambasted me up and down.
"Rising interest rates = stronger US Dollar"

That has always been true, but Peter Schiff and others have been saying that the Fed's efforts to raise rates are simply a ruse.. or a slight-of-hand trick to give the appearance of inflation fighting while behind the scenes they print money (m3 no-more) like mad. The Asians aren't suckers, I'm not sure about the rest of us.

Paul van Eeden is saying something similiar:
Agreed. I have no doubt the US dollar is toast. The question is when? 1 month? 1 year? 5 years? - I couldn't even begin to guess.
Here's a cool chart:

Higher Interest Rates Mean Higher Gold Prices
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