Gold buffeted in Eurozone crisis wake

In the Lead: “The Italian Job”

The euro took a painful slap on the chin this morning in the wake of estimates that the EU’s bailout water bucket may need to be twice as large (1.5 trillion) in order to contain enough liquid (all puns intended) to put out the fire that has now spread to the boot that is “Il Bel Paese.” As the euro dipped, the US dollar (along with gold) gained strength. The greenback surged by 0.61 on the trade-weighted index as, despite on-going budget wrestling matches in DC, the number of alternatives for ‘safe-haven’ money to take refuge in dwindled to a…precious few this morning.

As a matter of fact, despite the incessant calls from the US dollar morticians’ camp that the currency is about to meet its maker any day now, it turns out that it might just be the greenback’s year-long 13% slide that may have just come to an end. The market’s most accurate currency forecasting teams – led by the one at Schneider Foreign Exchange Ltd. – have concluded that the US currency will likely rebound to the $1.40/$1.41 by year-end.

More importantly (take note, dollar-demise-deputies) the world of hedge funds and large currency speculators is “no longer betting on the dollar to collapse.” That said, there are still some (Societe Generale, for one) who are holding out for a $1.50/1.52 dollar-euro by year-end. The dollar bears predicate their predictions on a Fed that will not/cannot raise rates and on a breakdown of budget ceiling talks (or worse). To be sure, SocGen’s bears have competition from another French team (the one at Credit Agricole) which envisions a dollar as strong as $1.30 against the euro by the time 2012 rolls around.

As regards potential dollar damage from an un-lifted US debt ceiling, the new head of the IMF, Christine Lagarde, warned that a failure to address the lifting of same by US lawmakers could have “real nasty consequences” for America’s and the world’s economy as well. Ms. Lagarde urged the warring parties in Washington to get their act together and do that which needs to be done to avert such deleterious outcomes.

President Obama addresses the nation this morning and will make his fifth set of public remarks on the thorny issue in front of microphones. The US President is trying to corral bipartisan support for a smaller deficit reduction program and is attempting to have the GOP’s and the Democratic Party’s leaders compromise on their current impasse on taxes and on entitlement programs. As before, the “red-letter” “D” date of August 2 still looms. To be continued (hopefully, for not much longer…)…

Meanwhile, over in China, there is a rising school of thought that now believes that, following the rise to 6.4% in June, the country’s inflation spiral may have peaked. The yuan did lose ground against the US dollar in the wake of weekend data that revealed the three-year record high for Chinese CPI. Local currency traders now no longer expect a faster rate of yuan appreciation for the second half of this year.

The PBOC is certainly not expected to relax its vigilant stance on the monetary front even if overt and frequent rate hikes are not necessarily going to be the order of the day. Pundits peg late November as the only likely time for the Chinese central bank to step off the policy tightening pedal, if then.

Until tomorrow, keep pedaling…

Jon Nadler is a Senior Metals Analyst at Kitco Metals Inc. North America

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About the Author
Jon Nadler Jon Nadler is a Senior Analyst at Kitco Metals Inc. North America
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