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INTERVIEW: US Dollar's Long-Term Uptrend Will Pressure Commodities - Newedge

By Debbie Carlson of Kitco News
Thursday May 23, 2013 2:20 PM

(Kitco News) - The U.S. dollar is in a long-term uptrend and the consequences of that mean commodities and countries whose economies depend heavily on commodity production will suffer, said a director of market strategy at a financial services group.

Canada, South Africa and Australia, three countries which have significant commodity-based economies, are vulnerable to weakness if the U.S. dollar stages a multi-year rally since resources are priced in dollars. Furthermore, the domestic situation in those countries leaves them at further risk of an economic slowdown, said Robbert van Batenburg, CFA, director of market strategy at Newedge USA.

The South African stock market is the most overextended relative to its currency and the Australian dollar is the most overextended relative to its equity market, he said, and Canada has a rising personal debt situation. “Stock markets and currencies of the commodity countries follow each other in lockstep … The South African stock market appears out of line with its currency and the trade deficits and the credit boom make its economy especially vulnerable for a commodity-induced economic slowdown. Similarly, the Aussie dollar appears overextended and Australia is also particularly vulnerable due to its trade balance and credit boom,” van Batenburg said.

Those three countries also have big mining industries, and already the slowing of the mining industry is affecting sovereign growth. Australia’s central bank recently cut interest rates in a surprise move over concerns of the economy turning sluggish. But van Batenburg said one rate cut won’t help.

There are a few factors in the dollar’s favor to make it a sustainable trend, rather than a short-term rise, he told Kitco News in an interview.

First is that other central banks, most notably the Bank of Japan, are proceeding with their own quantitative easing programs and are starting fresh, whereas in the U.S. the discussion is turning to not if, but when, the Fed might start to ease off the bond-buying program, he said.

Second is the U.S. trade deficit is beginning to shrink, mostly because of declining crude oil imports. Third, the declining rate of inflation is lifting the real yield of U.S. fixed-income markets.

The final point for the strength in the dollar is the slowing of Chinese economic growth, he said, which is slowing the demand for commodities there, particularly the industrial commodities.

Van Batenburg said China’s economic data remains opaque still, compared to what’s known about the sovereign debt situation in Europe and the problems in Japan. “It’s a known unknown,” he said, adding that there are greater risks that China’s economy is slowing more than is being acknowledged. “If that’s the case, it could have great implications and could (create) a great dollar rally,” he continued.

Commodity markets as a whole usually are hit the hardest when the dollar rallies since raw materials are dollar-denominated. Within the sector, he said industrial metals will likely fare worse than other materials markets because of the slowing Chinese demand. Crude oil has more of an inelastic demand quality to it and agricultural producers can tinker with output from year to year, which means those markets are less likely to be as impacted.

Gold, and silver to an extent, could be also be tarnished more than other commodities if the dollar is in a long-term uptrend, he said. For the most part, gold trades directly opposite the U.S. dollar. Additionally, he said, a rising dollar “throws the idea of (dollar) debasement out the window.”

There are mixed views on the dollar’s outlook, with some currency analysts agreeing with van Battenberg that a long-term rally is likely, but others remaining bearish on the dollar. In this case, he said when looking at the dollar, it’s important to look at it in relation to other currencies. Other countries are seeking to weaken their currency against the dollar.

It’s possible the dollar’s rise could go on for at least a decade, based on historical movements, he said. When President Richard Nixon took the dollar off the gold standard and let it float freely, it fell in a nine-year slide that ended in 1980.

“From that low the dollar rallied 77% against all major currencies and peaked by the end of 1984,” he said, freefalling again as President Ronald Reagan “orchestrated a collective G5 effort to debase the greenback in September of 1985. The dollar didn’t reach its nadir until 11 years later (in) June 1995. The subsequent rally petered out in June of 2001 and the dollar began once again a 10 year slide, bottoming out in the summer of 2011. Now the dollar is staging a slow but steady rally against the major foreign currencies,” van Batenburg said.

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By Debbie Carlson of Kitco News dcarlson@kitco.com

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.

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