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US Dollar Falls to New Low

us-dollar-2009-07-31

The dollar has taken a big tumble today, falling below the technically significant 78.50 level. This is helping to push up the price of oil to near $70 per barrel:

oil-2009-07-31

And the price of gold is also rising:

gold-2009-07-31

Gold and oil generally trade inversely to the dollar. By increasing our budget deficit to $1 trillion this year and for most projected budget years in the future, we have guaranteed that the value of the dollar will fall.

Now tell me, aren’t gold and oil likely to be fairly low risk investments given the known situation of a dollar under pressure? I think so. Oil and gold are stores of value that people shift into from the dollar and treasury securities. This is a tough time to be issuing government bonds to fund a deficit.

We can have short-term moves up by the dollar like you see happened for several days in early-mid July based upon government intervention. But intervention simply yields short-term support, not the catalyst for a major change in trend.

This could get pretty ugly as the next likely target for the dollar is around 73 from the current $78.39. This could push oil up toward the top of our $75 per barrel range. It could also push gold up to the $1,000 range that has presented strong overhead resistance.

We will be watching this unfold very carefully.

Mark