Bloomberg News reports that Ben Bernanke's talk about not cutting interest rates is strengthening the dollar. The result is that speculators are covering their short positions on the dollar and dumping their long commodity trades. These moves are causing crude oil, sugar and copper prices to tumble.
All I can say is -- fantastic! As I've posted, a weak dollar has boosted commodity prices and a strong one would reverse the tide of rising commodity inflation. These rising prices have squeezed consumers, whose spending accounts for 70% of GDP growth. If Bernanke's talk about putting a halt to interest rate cuts continues to strengthen the dollar, commodity prices could fall further.
In cutting interest rates from 5.25% to 2%, Bernanke has contributed to a rapid rise in commodity prices. But the accumulating evidence of building inflationary expectations has him returning the Fed to its roots as the defender of the dollar. Paul Krugman's weak defense of Bernanke's pro-inflationary policies appears to have marked their end.
Let's hope Bernanke will back up his strong dollar talk with a rise in interest rates.
Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter.
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Reader Comments (Page 1 of 1)
6-04-2008 @ 1:22PM
speculator said...
The dollar is in a bear market rally. High commodity prices are one reason why the dollar will be down long-term. George Soros thinks commodities are in a bubble. I write about it today @www.theinvestingspeculator.com
6-04-2008 @ 3:31PM
Michael Schneider said...
Stabilizing oil prices are good even for oil companies here so it is good to see that-- oil was just moving too fast. I wouldn't favor raising interest rates right now though and I don't think we will see that because housing is in very bad shape. Also the economy faces less stimulus as the election will be over in November and the media and travel spending going into the economy for that won't be there. China's Olympics will also be over which could slow things down over there though there will be rebuilding from the earthquake. Japan is teetering on the brink of recession and European economies are also slowing as Europe has not cut rates. State and local governments will be pressured in spending plans because of less property tax collections from housing and from sales taxes and even car taxes as people hang on to cars longer. It would seem the risks are greater on the downside.
6-05-2008 @ 11:03AM
Johny said...
A Bullish trend for the dollar has started. As the economy is in better shape than anticipated, (where is the recession???), investor's appetite for equities will gradually return. The influx of capital from overseas should prop up the dollar. I believe that we've seen the peak in oil for this decade. Oil should fall further slowly and painfully for the "longs" especially. Watch the traded volumes for clues.
6-05-2008 @ 11:08AM
Johny said...
One more thing to say: Ben you are my hero! As Greenspan will go down in history as the one that caused the sub-prime bubble, Ben will go down in history as the one that prevented the financial markets meltdown and possibly a very deep recession. Well done Ben!