Fed Hits Dollar Panic Button

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The very first headline I saw this morning was "Bernanke Boosts Dollar, Commodities Down" (stock futures were also down, but this wasn't emphasized). As pointed out in this blog yesterday, the invisible hand of the Treasury looked like it was active in supporting the dollar in market trading after the opening and there were rumors that smaller central banks in Asia were buying dollars to try to push down their own currencies (new reports today confirm that South Korea, Hong Kong, Taiwan, Thailand, the Philippines have indeed done this and Indonesia probably has as well). Russia bought dollars overnight and has been doing so all week. The U.S trade-weighted dollar actually fell through critical support at 76.00 first thing in the morning on Thursday and closed just below that level in the afternoon. It fell to a new intraday yearly low of 75.77 and yearly closing low of 75.97.

PR support from the Fed to try to jawbone the dollar up was inevitable. You can expect a lot more of this in the future as well. Bernanke's remarks were essentially meaningless, but the mainstream media gave this non-news item major coverage (you should ask yourself why). Specifically, Bernanke said that the Fed will tighten monetary policy "when the economic outlook improves sufficiently," "the time will come when we have to tighten", "at some point" and "we will look at the broad outlook to decide". There is certainly a lot of new information in those statements ... at least for people who thought the Fed would not raise rates during an economic expansion on until the year 3000. What would investors do if we didn't have the media to keep us informed?

In the statement from its most recent meeting a couple of weeks ago, the Fed said that its accommodative policies will likely be warranted for an extended period. This was a blatant admission that they don't really believe the economy is recovering. The Fed has also continually assured the public that there is no danger of inflation. In his remarks though Bernanke admitted that the Fed can't keep monetary policy accommodative indefinitely for fear of triggering an inflationary surge. The gold breakout this week has already made the market's opinion on this matter quite clear - it's already too late.

So far this morning the trade-weighted dollar is at 76.33, having gapped up to 76.25 on the open from the below 76.00 close yesterday. The monetary authorities are clearly worried about the dollar falling and staying below 76.00. A test of the old low at 71.50 is almost inevitable if this happens... and they know it. Gold, which was began selling off last night, before the Fed news appeared, is trading at $1052 as I write this. $1050 is a minor resistance level for gold and it is trading just above and below this level so far today. Expect the gold dollar struggle to continue for some time.

NEXT: Subprime Crisis #2 Coming Soon

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.