Dollar Weakness Ignites Economic Activity

Strategic Insights -

The sudden drop of the US dollar to a 15-month low on Wall Street, despite a closed bond market and lack of economic reports, triggered a chain reaction that energized key sectors of the economy, including stocks, gold, and oil. Amidst a backdrop of persistently low interest rates, the dollar's decline lured investors into the booming stock markets, with many analysts warning that the eight-month stock rally has overestimated the economy's health. The Federal Reserve's decision to keep interest rates near zero for at least six months has further weakened the dollar.

Key Takeaways:

  • The dollar's weakness has led to increased demand for gold, with prices reaching a record high of $1,117.40 an ounce on Wednesday.
  • US Treasury Secretary Timothy F. Geithner emphasized the importance of a strong dollar for the country's economic recovery.
  • Some analysts believe that policymakers are secretly pleased with the dollar's depreciation, as it makes American products cheaper overseas and encourages domestic consumption.
  • Gold prices have set multiple record highs as hedge fund managers and wealthy speculators continue to buy the precious metal.
  • The Dow Jones industrial average ended the day up 44.29 points, or 0.43 percent, at 10,291.26, while the S&P 500-stock index rose 5.50 points, or 0.5 percent, to 1,098.51.
  • Crude oil prices settled at $79.28 a barrel, up 23 cents, on the New York Mercantile Exchange.

Statistics:

  • The US dollar dropped to a 15-month low against the euro, ending the day at $1.4976.
  • Gold prices reached a record high of $1,117.40 an ounce on Wednesday.
  • The Dow Jones industrial average ended trading up 44.29 points, or 0.43 percent, at 10,291.26.
  • The S&P 500-stock index rose 5.50 points, or 0.5 percent, to 1,098.51.
  • Crude oil prices settled at $79.28 a barrel, up 23 cents.

Sources:

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  • "Dollar's drop sparks rally on Wall Street, oil prices rise." Reuters. 11 Nov 2008.
  • "FTSE 100 closes lower but shares in the US have a night off." The Times. 11 Nov 2008.
  • "China posts strong growth figures." The Times. 12 Nov 2008.
  • "Market Digest - early highs behind." Bloomberg. 12 Nov 2008.
  • "Mr. Market is playing a cruel game, but he is playing." The New York Times. 11 Nov 2008.