The US Dollar heads down again!
Wednesday, May 21, 2008 at 08:48PM
Gold Prices in Gold, Other
USD Chart 22 May 2008

As we can see from the chart the USD did try to consolidate and put in a short rally and the technical indicators have taken a downturn so it now looks like dollar has run out of steam. Inversely gold has responded and moved higher.

The Federal Reserve has reduced its 2008 U.S. economic growth forecast and recognised that inflation has now appeared on the their radar. This will at some time in the future put a halt to rate cuts and could help the dollar to stabilise. From the minutes of the Fed meeting held on 29-30 April 2008

"Several members noted that it was unlikely to be appropriate to ease policy in response to information suggesting that the economy was slowing further or even contracting slightly in the near term"

In an article carried by Reuters on BNN the Fed goes on to revise its projections for growth for 2008 down from 1.2% to 0.3%.

Now, if the rate-cutting season is indeed over and the Fed decides to focus its attention on slaying the inflation dragon then the dollar could strengthen and gold could fall. However, we are of the opinion that two things will happen: firstly the dollar will not be saved by interest rate hikes and secondly, sooner or later gold will disconnect from the dollar and head higher oblivious to the dollar. The latter could occur towards the back end of the year when we anticipate gold surpassing its previous high. Any rise in the dollar will be seen by some holders of the dollar as an opportunity to get out at a slightly higher level than it is now and thus limit their loses and put a damper on the dollars progress.

Time will tell.

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