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Fed Tactics May Scare Investors Out of Dollar, Gold

Tuesday, 01 Mar 2011 12:03 PM

Some traders, wary of Federal Reserve Chairman Ben Bernanke’s intentions, have begun to eye the exits. They fear a rush away from the dollar but also believe it might be time to cash in perceived value in other currencies, such as the beaten-down euro, and in gold.

The Dollar Index, which measures the dollar against a basket of competing currencies, trades around 77 now, falling over the past few days in the direction of its crisis low in late 2009 of around 74.

In August, just before Bernanke announced the second, $600 billion round of quantitative easing, the index topped near 89.

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Fed Chair Ben Bernanke
Gold is sharply higher, recovering nearly all of its losses since the year began to trade at $1,422 per ounce.

Some have gone so far as to declare the end of the dollar as the favored safe haven in uncertain times. If true, a stampede out of dollars could inadvertently lead to much higher prices for commodities already in the stratosphere, such as energy and food; a bond fire sale for holders of Treasurys; and suddenly higher U.S. interest rates. That would certainly choke any incipient U.S. recovery.

"Over the last 20 years, people have always moved into the dollar on any sort of uncertainty in the global economic space, but what we've seen over the past two weeks is actually a terrific move out of the dollar," Douglas Borthwick at Faros Trading in Stamford, Conn. tells The Wall Street Journal.

The biggest fear, some say, is a mixed signal from the Fed on the current, second round of dollar printing, known as quantitative easing.

The latest $600 billion round is blamed for inflation in the emerging world, and questions surround the end of the program, scheduled for June.

Will a “QE3” be necessary? Bernanke remains focused on the jobless rate, and sudden, new dip in the U.S. economy could force his hand, prompting an extension of the controversial easing operations.

“It seems the dollar’s haven status has vanished,” Steve Barrow at Standard Bank tells CNBC. “And, even for long-term dollar bears like ourselves, this is a worry.”

Chaos across the Middle East is brought up as a key driver of flight to quality, historically to the dollar, but traders wonder if this time things are different in light of Fed easing uncertainty and concerns that U.S. stocks, double their value from the bottom in March 2009, are unsustainably high.

Of course, as panic rises and ebbs with the headlines, volatility is as likely as a solid trend in any direction as traders play both sides of the equation. Unknown are the headlines to come, both positive and negative, and their effect on sentiment.

If the dollar is best abandoned, however, nobody seems to have told the Chinese. Treasury reported that Chinese holdings of dollar-denominated debt rose to $1.175 trillion in October, a record. It was $1.16 trillion at the end of 2010, a revision by Treasury upward from $891.6 billion.

“They will keep on buying Treasury bonds,” Kazuaki Oh’e at CIBC World Markets Japan told Bloomberg News. “The euro was in trouble last year. They need to buy dollar assets.”

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Some traders, wary of Federal Reserve Chairman Ben Bernanke s intentions, have begun to eye the exits. They fear a rush away from the dollar but also believe it might be time to cash in perceived value in other currencies, such as the beaten-down euro, and in gold. The...
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2011-03-01
Tuesday, 01 Mar 2011 12:03 PM
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