Dollar relapse pushes gold to new peak

By Jamie Chisholm, Global Markets Commentator

Published: November 16 2009 07:16 | Last updated: November 17 2009 06:05

20:30 GMT. The price of gold hit another record on Monday as the dollar resumed its downward trend, helping global equities to fresh highs for 2009.

Asian and European bourses started the week in generally fine fettle and Wall Street joined the trend, with the S&P 500 claiming another peak for the year, closing above 1,100. The MSCI all-country World index jumped 1.6 per cent to its best level in 13 months, according to Reuters data.

Stronger-than-forecast US retail sales numbers for October added to the optimistic mood, though traders had a wary eye on a speech by Ben Bernanke, lest the Fed chairman give any clues about his monetary exit strategy.

But it was Mr Bernanke’s dollar comments that piqued investors’ interest. The chairman said the Fed was attentive to changes in the dollar and that its mandate should ensure the greenback remained strong. The remarks ignited a rally in the dollar, which quickly faltered. In late afternoon trade the dollar index was trading at new lows for the day, while oil and gold had risen sharply.

The dollar broke the 75 point mark on a trade-weighted basis and was trading at more than $1.50 to the euro in mid-afternoon trading in New York, but later pared its losses to trade at $1.4972 to the euro and 74.887 on a trade-weighted basis.

US Treasury yields fell to their lowest level for the day. The S&P 500 closed up 1.5 per cent at 1,109.30, having retreated from earlier highs of 1,113.7, but closed at fresh 13-month highs. The yield on 10-year notes was down 9 basis points at 3.34 per cent.

The Market Eye

Stock market bulls appear to have taken a great deal of comfort from Wall Street’s stoicism on Friday. Traders had to contend with two worrying developments. With so much market goodwill invested in the assumption that household spending will return to a semblance of normal, news of weaker-than-expected consumer sentiment numbers could have wakened the hibernating bears. But the data was dismissed. Next, there were signs that the Street’s favourite strategy, the ‘great correlation trade’ of risk on, risk off, had broken down. The dollar was firm while equities were higher and oil was lower. But the dislocation did not last. Monday’s action sees the trend of the last several months back on track. The danger for bullish investors is a sustained dollar bounce, a move that is becoming more likely according to Mansoor Mohi-uddin at UBS. “So far buying the US dollar on dips in November has been a fruitless strategy but the risk-reward for shorting the greenback is getting worse and worse the further the exchange rate diverges from fair value. For the USD/Euro, this is around 1.20-1.25,” he says.

Earlier in the global trading session, the resumption of dollar weakness had encouraged investors to add to bets in the carry trade, whereby the US unit is apparently sold to purchase riskier assets such as stocks and commodities.

The weaker dollar helped spot gold rise 1.9 per cent above 1140.

US crude oil settled $2.55 higher at $78.90 a barrel, after reaching a high of $79.52.

Higher commodities had earlier in the day given a boost to resources stocks, pushing the FTSE 100 up1.6 per cent to 5,382.7, the highest level for the London benchmark since September 2008. The FTSE Eurofirst 300 closed up 1.5 per cent at 1,034.5, breaching its previous closing high for the year just above 1,026.

Stock markets in Asia also made gains, though Tokyo struggled in the face of some big fundraisings. The Nikkei 225 eked out a 0.2 per cent rise to 9,791.2.

China’s stocks were in better mood as US President Barack Obama paid a visit. The Shanghai Composite jumped 2.7 per cent to 3,275.1 and Hong Kong’s Hang Seng index rose to a 16-month high, gaining 1.7 per cent to 22,943.9. Banking shares were particularly strong.

In Australia, miners helped push the S&P/ASX 200 up 1 per cent to 4,755.

The bullish tone in equity markets did not lead to any significant selling of government debt, however.

Japan’s 10-year JGB yield dipped 1 basis point to 1.340 per cent, despite news that the nation’s economy had grown at a faster pace than expected. Strong economic growth usually pushes yields higher.

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