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By Jason Simpkins
The dollar fell to yet another record low yesterday (Thursday), causing the price of oil to spill over $110 and driving the value of gold to the $1,000 an ounce mark for the first time ever.
The euro shot past $1.56 for the first time since its 1999 founding. The euro has gained nearly 20% against the dollar in the past year. And it's just one of the foreign currencies trampling the dollar on their way to all time highs.
The greenback is down 15% against the Canadian dollar, 10% against the Swiss franc, and 24% against the Brazilian real. The dollar also fell below 100 yen for the first time in 12 years yesterday. The dollar is down 10% versus the yen so far this year.
"The momentum is definitely downward for the dollar," Daisaku Ueno, senior economist at Nomura Securities, told the Associated Press. "With momentum going like this, no one knows where it will stop."
The dollar has fallen so far, so fast, that it's becoming a cause for concern overseas. Jean-Claude Trichet, the president of the European Central Bank, said earlier this week that "excessive volatility and disorderly movements" of exchange rates are "undesirable for economic growth." Trichet would like nothing more than to keep European interest rates high to squelch inflation, but the dollar's continued weakness is taking a toll on exports.
Japan is now encountering the same problem. A strong yen makes Japan's exports more expensive abroad, reducing profits. Yesterday's "excessive" movements in the dollar-yen rate caused a panic in Japan's market that drove the Nikkei 225 index tumbling 3.3% to 12,433.44.
A weak U.S. dollar has also driven up the price of commodities, as investors seek out a hedge against declining equities.
Crude oil futures rose to a record high $110.70 a barrel on the New York Mercantile exchange yesterday. Oil has closed at a record high in each of the past four days, despite the fact that U.S. crude stockpiles increased by 6.18 million barrels to 311.6 million for the week ended March 7. U.S. inventories were 1.9% higher than the five-year average for the period, the Energy Department reported.
Gold Shines as the Dollar Dives
Gold, another commodity traditionally viewed as a strong hedge against the dollar, also climbed to a record high. April gold futures hit $1,000 an ounce yesterday on the Comex division of the NYMEX. Six years ago, gold was only valued at $253 an ounce. It has since soared 295%.
Gold and oil aren't through with their record-breaking runs either. It's likely the dollar will sink further next Tuesday when the Federal Open Market Committee. The Fed has cut its benchmark federal funds rate by 225 basis points in the past six months, and many believe the FOMC will keep cutting rates to spur economic growth.
"At this point, I don't think they can afford to stop," Ram Bhagavatula, an economist and managing director at the hedge fund Combinatorics Capital, told CNBC, "They've sort of committed themselves to saving the financial sector, housing, the economy from recession."
Should the Federal Reserve follow through with another round of rate cuts – opening the valves of liquidity even wider – the dollar will continue to plummet. But some analysts agree that the weak dollar should not be the Fed's main priority.
"Bernanke was quite right to suggest he doesn't care about the dollar right now," Bernard Connolly, a global strategist at Banque AIG, told Reuters, "There's no dollar crisis, but there would be one if the Fed started constraining its interest rate policy because of the exchange rate."
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