It came without warning. Not. Whereas previous dollar-supportive statements from folks such as the Treasury's Mr. Paulson had been sent up as trial balloons in the markets, today's statement by the Fed's head, Mr. Bernanke was more like an across the bow warning salvo. Indications are that the Fed has now given fair warning about several things to the markets. The first item signaled was that the world's most powerful central bank would not welcome a further decline of the greenback on international currency markets. reports Marketwatch.
By tying the weakness of the dollar to the Federal Reserve's primary mission of fighting inflation, Bernanke effectively moved the U.S. currency to the top of the central bank's priority list. The dollar's recent low value has contributed to the unwelcome rise in import prices and consumer-price inflation, he said in a speech via satellite to an international banker's forum, adding that the Federal Reserve and Treasury are watching the situation closely.
Them's fightin' words. Do not be surprised to see actual currency market intervention (buying dollars) in the near-term.
Ben Bernanke's dollar-supportive words had a chilling and immediate effect on both gold and oil. The commodity duo started to fall apart shortly after comments by the Fed Chairman echoed the sentiment that an unwelcome rise in inflation had raised the central bank's levels of concern and that a strong dollar policy could lead to a more obvious fight against price increases. In a marked departure from the tone heard in previous jawboning sessions, Mr. Bernanke linked the declining dollar to the rise in inflationary pressures. Gold prices lost more than $16 at one point, dipping just under $875 per ounce, and at last check they were still down over $10 at $880.20 while silver showed only a marginal decline of 5 cents at $16.73 and platinum was down $10 at $1997 per ounce.
Mr. Bernanke was seen as drawing a line in the sand as to the amount that the dollar could or should fall by. Such posturing effectively obviates the death plunge in the currency that oil and gold had been eagerly awaiting since September. The greenback took off on a sharply higher trajectory following Bernanke's words. Crude oil finished under $125, down over $3 on the day. The risk to the downside for gold has now been significantly augmented once again. In the interim, George Soros puts the oil bubble and speculative funds at the top of the list of causes of the inflationary trend the US has been experiencing. It is possible that today will be recorded as the turning point for the dollar - something that we noted yesterday in the Dessauer comments. Who knew the living dead would be walking in the daylight 24 hours later...
In the interim, signs that commodities markets have not only come under scrutiny but are about to experience a few...changes (to say the least) are starting to show up. The New York Times reports that:
Regulators of the nation’s commodity markets will demand more information about investors to determine whether they are evading market limits on speculation and artificially driving up world food prices. The regulatory agency, the CFTC, also plans to initiate talks with bank regulators to ensure that adequate credit is available for the farm economy.
In addition, the commission intends to strengthen a program aimed at lowering the cost for farmers of hedging crop prices, which has grown more expensive with the increasing volatility in the markets, according to a draft of the proposals obtained by The New York Times. The commission is expected to announce the proposals Tuesday.
Finally, in an unusual departure from the secrecy that usually cloaks its enforcement actions, the commission will confirm that it is investigating the price spike that hit the cotton futures market in late February, a step demanded by cotton industry executives at a commission hearing on April 22.The commodity futures markets play a key role in establishing worldwide prices for wheat, corn, soybeans and other foodstuffs, as well as energy products like crude oil and natural gas.
But in recent years, these markets have also become an attractive haven for investors seeking both profits from rising prices and protection against inflation and a withering dollar. As a result, billions of dollars have poured into the commodity futures market — from pension funds, endowments and a host of other institutional investors — through the new conduit of commodity index funds.
Don't assume that is it just the CFTC that is caving to US politicians in this ominous process. Bloomberg reports that:
Austrian Finance Minister Wilhelm Molterer said he'll propose a Europe-wide tax on commodities speculation as people across the continent protest against higher fuel and food prices.
``A tax on speculation would boost transparency in the markets,'' Molterer said in a Bloomberg Television interview in Frankfurt late yesterday. ``It would send a signal that speculation is unwanted.''
Molterer is the latest European politician to criticize financial markets and suggest measures to contain prices. French President Nicolas Sarkozy earlier this year called for an end to a ``capitalism of lies, of frivolity.'' Three years ago, the chairman of Germany's Social Democratic Party compared investors seeking short-term gains to ``locusts.''
The doors of additional volatility and readjustments to the new Bernanke call are wide open in terms of possibilities and action. Betting much or in the wrong direction could prove a costly and/or premature exercise after today.