The Dollar Rallies Blunting Precious Metal Momentum

By Jason Simpkins
Associate Editor

The dollar rose the most against the euro this year yesterday (Tuesday), an indication that it could be readying itself for a rebound.

"The market focus has shifted," Michael Malpede, a senior currency analyst at Man Global Research, told Bloomberg. "We are going to see the dollar bounce further.

So far this year the dollar has been bullied by foreign currencies. It suffered its biggest quarterly drop against the euro in nearly four years in the first three months of 2008, falling 8.2%. However, the gasping greenback showed signs of life yesterday, climbing more than 1.3% against the euro in early morning trading.

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The dollar also gained against the Swiss franc (up 1.4%) and Japanese yen (up 2.15%). The dollar index, which measures the greenback against a basket of currencies, was at 72.522, up from 71.749 late Monday. It had dropped to a record low of 70.698 on March 17.

The rally was, in part, spurred by strong data from the Institute of Supply Management, whose index increased from 48.3 in February to 48.6 in March.

It was also bolstered by a recovery in the financial sector, which climbed 5% on news that Lehman Bros. Holdings Inc. (LEH) and UBS AG (UBS) would raise $19 billion. Lehman sold $4 billion in shares and UBS said it would seek $15 billion in a rights offering.

The dollar’s spike means trouble for commodities prices, which benefited greatly from a floundering financial sector and weak dollar.

"Everything from cotton to copper and soybeans to silver is off sharply," Jon Nadler, senior analyst at Kitco Bullion Dealers, told MarketWatch. "The ever-weakening dollar had prompted many a fund to pile money into the sector since September last year, pushing values of some commodities well beyond fundamentals."

"But now, as the dollar is staging somewhat of a comeback, even if a temporary one, the niche is being drained of money quite fast," Nadler said.

Gold for June delivery tumbled $33.70, or 3.6%, to close at $887.80 an ounce on the New York Mercantile Exchange, as investors abandoned their hedge positions. The precious metal earlier fell to a low of $876.30.

May silver futures fell 42 cents to $16.89 an ounce, June palladium fell $1.60 $448.60 an ounce, and May copper futures dropped 2.1 cents, to $3.81 a pound. Oil dropped 60 cents, or 0.6%.

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