Money and Metals

FX Street reports on currencies. "The dollar fell against other major currencies Tuesday after a government report showed the U.S. trade gap widened more than expected in December. The trade gap widened by 5.3% in December to $61.2 billion, the Commerce Department said Tuesday. Analysts surveyed by MarketWatch had expected the deficit to increase to $59.5 billion. For all of 2006, the U.S. posted a record trade deficit of $763.6 billion."

"The data are 'dollar bearish,' said T.J. Marta, fixed-income strategist at RBC Capital Markets. 'This report will likely cause a further downward revision to' fourth-quarter gross domestic product, he said."

"In New York trading, the euro stood at $1.3022, compared with $1.2961 late Monday. The dollar was quoted at 121.28 yen, compared with 121.94 yen. The British pound traded at $1.944, compared with $1.9474. The dollar changed hands at 1.2486 Swiss francs, compared with 1.2532 francs. The euro fetched 157.97 yen, compared with 158.05 yen."

"'Market players remained wary of putting on additional short positions ahead of this week's GDP numbers and next week's BOJ meeting,' said Boris Schlossberg, senior currency strategist at DailyFX.com. The yen also found some support after reports that North Korea agreed to shut down its nuclear facilities in return for energy aid and security guarantees, he said."

"'Last year relations between Pyongyang and Tokyo were sorely inflamed when the latter test fired several missiles in the Sea of Japan and claimed that it detonated nuclear device underground. Tonight's news removes the one nagging geo-political threat in the region and should be a long term political positive for the yen,' he wrote in a note."

From MarketWatch. "Gold futures closed higher Tuesday, recouping some of their recent losses and sending their benchmark contract to its highest level in six months as a record U.S. trade deficit fueled a decline in the dollar. But prices ended below the day's best level with news of disarmament plan for North Korea likely easing some of the interest in gold as a safe-haven investment."

"Gold for April delivery closed up $1.20 at $668.50 an ounce on the New York Mercantile Exchange. It traded as high as $673.70, the contract's strongest intraday level since early August."

"Gold prices spent the session trading steady to higher 'in spite of news that North Korea has agreed to accept aid in exchange for shutting down its nuclear reactor,' Todd Hultman, president of DailyFutures.com, said."

"'The number that likely lit the fuse under gold today was the much wider-than-anticipated December trade gap,' said analyst Jon Nadler. 'Reality certainly set in this morning as the U.S. currency took a dip against the euro, itself boosted by reports of better than 3% GDP growth in the euro zone,' Nadler said."

"Other metals prices followed gold higher. March silver closed up 1.5%, or 20 cents, at $13.915 an ounce after reaching a two-month high of $14. March palladium added $6.85 to end at $344.60 an ounce and April platinum climbed $14.70 to close at $1,206 an ounce."

"'Looks like today might signal the week for silver to break out above $14 per ounce finally,' said Neal Ryan, director of economic research at Blanchard, which has 'been waiting on this one and expecting it to outperform gold and platinum for a while now.'"

The Shanghai Daily. "Many people have been asking why the dollar hasn't crashed yet. Will the United States ever face a bill for the string of massive trade deficits that it has been running for more than a decade?"

"Including interest payments on past deficits, the tab for 2006 alone was over US$800 billion, roughly 6.5 percent of US gross national product. Even more staggeringly, US borrowing now soaks up more than two-thirds of the combined excess savings of all the surplus countries in the world."

"Foreigners are hardly reaping great returns on investing in the US. On the contrary, they typically get significantly lower returns than Americans get on their investments abroad."

"If America's competitive position is so weak, what magic is holding up the dollar?"

"The first answer, of course, is that the trade-weighted dollar has fallen; by more than 15 percent in real terms since its peak in early 2002. Yet the US deficits have persisted, and even risen, since then."

"The real driving force has been two-fold. First and foremost, America's government and consumers have been engaged in a never-ending consumption binge. The epic boom in housing prices of the last 10 years has spread deep into the American middle class.
Unemployment is at a cyclical low, and the economy appears to be less volatile than at any point in modern history. So it is not surprising that private consumption continues to hold up even as US economic growth has shifted into lower gear."

"It is less easy to rationalize why the US government is continuing to run budget deficits despite a cyclical boom."

"Of course, it takes two to tango. In order for the US economy to run deficits with the world, other countries must be willing to spin off a counterbalancing supply of savings. Ben Bernanke, the US Federal Reserve chairman, once famously pinned the whole US current account deficit on a 'global savings glut.'"

"But it would be more accurate to say that there is a global investment shortfall, with investment trending downwards despite the upward trend in global growth."

"What then is future of the dollar? As long as the status quo persists, with strong global growth and stunning macroeconomic stability, the US can continue to borrow and run trade deficits without immediate consequence."

"Over time, the dollar will still decline, but perhaps by no more than a couple of percent per year. Nevertheless, it is not hard to imagine scenarios in which the dollar collapses. In principle, one can also think of scenarios in which the dollar shoots up, but overall these seem less likely. But some day, the US may well have to pay the bill for its spendthrift ways."