Risk-off leaves commodity dollars in a curious spot

As fear gauges rise around the world with the increasing use of the term 'deflation,' the dollar is weakening against a basket of competing safety havens. The surging price of crude oil brought about largely by a speculative binge is likely to lengthen the so-called 'extended period' of accommodative monetary stance at the Federal Reserve. At the same time the eye-popping jump in energy costs is feeding inflationary fears elsewhere causing speculation that tighter monetary policy will lead a slowdown.

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U.S. Dollar – With equity index futures already are stumbling backwards as today’s initial claims data is likely to be a no-win situation for the greenback. Its index against a basket of major trading partners remains lower by 0.2% at 77.26 and even a low level of unemployment benefit claims could quickly be consigned to the trash can as historic data in light of the speed of events shaping the Middle East. There is little that can be done to persuade speculators that supply disruptions are limited or that leading oil-producers could pick up the slack. Meanwhile economists are diligently revising down growth estimates as a result of firming energy prices with the altogether more dire prospect of recession should crude oil prices remain elevated for longer. Even a spike could have a substantial psychological impact on both hiring intentions and consumption. The FOMC is likely to remain on hold for longer at this stage with a widening of the reach of political uprisings showing no sign of abating. The traditional safety aspect of the dollar is playing second fiddle to the Japanese yen. No one really anticipated firmer monetary policy from Japan until perhaps next year while the role of the Swiss franc as an alternative to the troubled euro has driven it to a record against the dollar today.

British pound – The risk-off nature of trading is weighing on the pound today because lower growth is a challenge to the clarion call of those assuming the Bank of England must tighten monetary policy to control inflation. Overnight MPC member David Miles warned that the central bank need not tighten policy in order to earn its inflation-fighting credentials, at least not in aggressive fashion. He noted that the risk to the Bank’s growth profile was to the downside. Events unfolding in the Middle East must surely raise the stakes on that count. Meanwhile Mr. Miles also admitted that inflation was “deeply worrying” but argued that it was not the result of necessarily loose monetary policy but instead was rooted in tax increases and rising commodity prices. Elsewhere the pound was rocked by a CBI report showing that retailers expect to see sales stagnate in March. The pound fell across the board and buys $1.6162 today while a strengthening euro buys 85.16 pence.

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