US Dollar Up, Everything Else Down

A raft of bad economic news from around the world, coupled with renewed doubts that leaders in the Eurozone are any closer to resolving the debt crisis, triggered a flight out of almost every asset into the relative safety of the US Dollar and US Treasury bonds.

More evidence of a slowing global economy

Sentiment among Japan’s large manufacturing firms fell more than economists projected, department store sales in South Korean fell for the first time in almost three years, and a preliminary estimate showed China’s manufacturing sector may have contracted for a second month.

Eurozone debacle continues

The market has realised once again that the so-called comprehensive and final “fiscal compact” was no more comprehensive and final than any of the previous failed deals. As with previous meetings, the only action point on which all the Eurozone leaders agreed was to have another meeting in March.

Germany’s refusal to even discus Eurobonds or an expanded jointly-guaranteed European Stability Mechanism means that the summit failed to reassure investors that their money will be protected from either devaluation or default.

The summit also failed regarding the role of the ECB. The market is looking for a pledge of unlimited lending from the bank in order to buy time for the lengthy political process to catch up to reality.

This latest wave of pessimism sent Italy’s five-year bond yield to a 14-year high yesterday. It also puts further pressure on the ratings agencies to strip France of its AAA rating.

Rush to the US Dollar

In a scenario highly reminiscent of 2008, the past three days have seen a mad dash out of the Euro and other risk assets into the US Dollar and Treasuries. Treasuries gained for a fourth day, pushing the yield on the benchmark 10-year note down three basis points to 1.87%.

The flight out of the Euro gave a huge boost to the US Dollar. The Euro fell below $1.30 yesterday, while the US Dollar Index (see chart below) climbed above 80 for the first time in almost a year.

Chart courtesy of

Short-term outlook for gold

The big spike in the US Dollar has sent gold sharply lower and some serious technical damage has been done with the price breaching several support levels on the charts.

Chart courtesy of

For now at least the US Dollar has strong upside momentum and therefore we can expect the selloff in gold to continue. Failure to hold the September low of $1,535 will send the yellow metal all the way to $1,500.

The selloff in gold together with lower official inflation rates in the US gives the Fed the cover it needs to launch QE3 in 2012.

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