Despite (or because of) the falling U.S. dollar, the stock market continued rising last week, up 2% in the first week of October after rising 9% in September - the two most notoriously bearish months in market history. Of course, the improving economic fundamentals and anticipation of the November elections are also a big part of the rise, but the biggest profit engine behind the market's 11% rise in the last six weeks is the sudden dollar decline after the Federal Reserve launched its latest quantitative easing campaign.
The biggest news last week was that the U.S. dollar sank to a new all-time low to the Swiss franc, a 27-year low to the Australian dollar and a 15-year low to the Japanese yen. The euro, which is also relatively weak, due to sovereign debt fears, rose to $1.40, up over 17% from its low of $1.19 last June. For the first time ever, one Swiss franc is now worth more than one U.S. dollar, while the Australian dollar is rapidly approaching par with the U.S. dollar. That is probably why the Reserve Bank of Australia did not raise its 4.5% benchmark interest rate last Tuesday, even though many economists expected they would. They probably feared that a stronger Australian dollar would hurt their resource-based export businesses.
This severe dollar swoon started six weeks ago, after the Fed started talking about Quantitative Easing II (QE-2). Other central banks have fought back by launching a "race to the bottom" for interest rates and currency values. It's like a central bank "limbo" contest ("How low can you go?"), since many central banks are lowering their key interest rates and printing more money via quantitative easing. Even the Bank of Japan became so frustrated with the strong Japanese yen (hurting Japan's exports) that it decided it "could not take it anymore," and slashed its key interest rate to 0% for the first time in four years.
Not to be outdone by the Bank of Japan, Fed Chairman Ben Bernanke said last week that he believes "further asset purchases" by the Fed could help the U.S. economy. Bernanke believes the U.S. economy is weak and that more quantitative easing is the only way to avoid a double-dip recession. The Chicago and New York Federal Reserve presidents also implied that more quantitative easing is in the cards.
Weak Dollar Fuels Commodity Price Inflation
Due to the U.S. dollar's massive depreciation, we are already seeing rapidly rising commodity prices, since approximately 88% of the world's commodities are priced in U.S. dollars. Ironically, gold and oil grab all the headlines for their price increases, but selected other commodities are rising much faster:
Price increases have picked up at an even more rapid rate in the first week of October, due to a more rapidly falling dollar last week. In addition to a falling dollar, agricultural commodities were especially hurt by a hot summer in the U.S., droughts in Russia and Brazil and heavy rains in Canada and Europe. This has pushed up prices of many grain and oilseed crops this year. For example, the U.S. Department of Agriculture recently predicted that America's corn crop would decline to the lowest level in 14 years. This, in turn, sent the price of animal feed soaring and will result in higher prices for chicken and beef.
Another example of brewing inflation is crude oil, which normally declines in the autumn months as worldwide demand moderates, simply due to more mild weather and the fact that more people live in the Northern Hemisphere. However, due to the fact that the U.S. dollar has been on a slippery slope, crude oil prices are now actually rising, despite high inventories, simply because crude oil is priced in U.S. dollars. Obviously, if the Fed tries to reignite inflation, it will continue to push energy prices higher.
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