Gold prices plunged to a two-week low after the dollar rose surged against the euro. Other precious metals also fell sharply Friday. However, crude oil surged to a new record of $117 and wheat prices plummet.
The dollar edged higher after European officials expressed concern that its euro strength was becoming harmful. A stronger dollar encourages investors to sell hard assets like gold and silver, which are viewed as inflation hedges since they’re known for holding their value in times of rising prices.
Gold for June delivery dropped $27.70 to settle at $915.20 an ounce on the New York Mercantile Exchange, after earlier falling as low as $907.30, its lowest level in two weeks. Gold was “heavily weighed down by an initial retreat in crude oil and the dollar’s rapid ascent,” Jon Nadler, analyst with Kitco Bullion Dealers Montreal, said in a note.
In energy futures, crude oil shot up to record level after a militant group in Nigeria said it had sabotaged a major oil pipeline operated by a Royal Dutch Shell PLC joint venture. The group promised further attacks on the country’s petroleum industry, rattling investors who have pushed oil prices to record highs for five straight days.
In agriculture futures, wheat plunged to its lowest level in four months as investors bet that favorable weather in the U.S. Midwest would boost crops.
There are two key factors of a weak dollar. A surge in exports and expectations that the economy will begin to show signs of the growth during the second half of the year.
The dollar has helped lift sales at U.S. manufacturers that export their goods, including large multinational companies like Boeing, General Motors and Apple. Trade numbers published by the Commerce Department showed that exports jumped 1.6% percent in January.
And with hopes that the economy will bounce back in late 2008, that should also be good news for the dollar. That’s because the Federal Reserve would stop lowering interest rates if the economy shows signs of recovering.
Rate cuts are partly to blame for the weak dollar because lower short-term rates have helped fuel the rise in oil and other commodities and undermine confidence in the dollar.
Everybody is concerned about the weak dollar. But even as the greenback sinks to new lows against the euro and other global currencies, experts say this is not necessarily a bad thing for the U.S. economy.
The falling dollar pose problem for an economy in recession and facing higher inflation. Consumers have to pay more for imported goods like toys made in China or a bottle of wine from France’s Bordeaux region.
It also drives up the cost of commodities priced in dollars. And unless you’ve been living under a rock, commodities have skyrocketed to historic highs.
Confidence by international investors in buying dollar-denominated securities is also affected. Although many foreigners are still buying more U.S. securities than they are selling, there are signs that these investors are slowly shifting away from assets tainted by the greenback, such as U.S. Treasurys.
