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Greenback a Cure for Commodities?

December 15, 2008 at 11:46 by Mario

The U.S. dollar tumbled yesterday between 1 and 4.7 per cent against the world’s major currencies and that could be good for U.S.-dollar-denominated commodity prices.
The main beneficiary of the swing during the past few days has been gold, which is once again trading above $800 (U.S.) an ounce. Oil prices have also shown some signs of strength.

But the question shell-shocked investors in commodities must be asking is whether the flight to safety that has pushed the U.S. dollar higher, and commodities lower, over the past few months is over?
“This has been the sharpest and steepest downturn in aggregate in commodity and energy prices ever,” said Bart Melek, global commodity strategist for BMO Nesbitt Burns Inc. “In terms of magnitude it’s not much different; it’s the speed of it.”
Much of the pullback is a result of the trade finance cutbacks and de- leveraging by banks and hedge funds as a result of the credit crisis because the commodity price declines are far in excess of the supply and demand fundamentals, he said. “We still have more pain coming, but I don’t see a lot of downside remaining.”
However, base metals and bulk commodities could remain under pressure for much of 2009 with only a modest turnaround expected in the latter part of the year, according to BMO Nesbitt Burns. Large segments of the nickel, zinc, aluminum and copper markets are operating below their cost of production, it said.
The rise in oil during the past few days is a result of the stronger dollar and talk of production cuts by the Organization of Petroleum Exporting Countries, said Robert Tebbutt, vice-president of Peregrine Financial Group Canada Inc.
As far as the equity markets’ ability to look ahead goes, the only major index up strongly during the past month is China’s CSI 300 index, which has climbed 13.6 per cent. That could bode well for commodities.
So it looks like the beleaguered manufacturing sector at least can expect continued relief from declining costs. The producer price index scheduled for release today is forecast to have declined 2 per cent in November, compared with a 2.8-per-cent drop in October, according to a survey of economists by Bloomberg.
That would mark the fourth consecutive monthly decline.

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