US Dollar Strengthens as Bonds Fall

By John Lee
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U.S.10-year Treasury bond prices fell today, on expectations that Fed Chairman Bernanke's speech later this week will lower expectations for a rate-cut this year. Bonds shot up in June after the Fed ended its rate-tightening cycle on slowing growth and moderating inflation. Many investors speculated that the Fed would be forced to cut rates by March to deal with a slowing economy. However, a string of positive, turn-around reports have pushed bond prices lower since early December. Bond prices usually rise on economic weakness and fall on strength, so traders are viewing these reports as a positive factor for the U.S. economy. After a number of hawkish comments from Fed Presidents last week, most investors expect Bernanke's thoughts to echo hawkish sentiment, with a sharp eye out to keep a lid on inflation.

The yen rose off of record lows against the euro, while the dollar pushed higher against both the euro and the yen. The G-7 committee this weekend warned against one-sided trades against the yen, which helped to push the yen off record lows against the European currency. The dollar surged on expectations of hawkish comments from Bernanke later in the week. The international currency market favors currencies backed by inflationary, positive-growth economy, which puts Europe in the best light. Japan has struggled to produce any consistently positive numbers, which has led to record lows and political warnings by the G-7 currency against major yen weakness. The U.S. economy slumped during the second half of 2006, which led to yearly lows against the euro, but recent reports have helped to boost the dollar.

Crude oil futures fell over 3%, after Saudi Arabia told Asian refineries to expect a larger shipment of oil next month than what was previously expected. The delivery jump hints at higher-than-expected levels of Saudi reserves, which sent prices lower. OPEC also signaled that no additional rate cuts are on the table, which helped to push prices lower. Crude fell more than 30% from record July highs, before bouncing back in the last few weeks on cold weather and greater demand from the U.S. The U.S. announced plans to double its strategic oil reserve over the next decade, which would take a large amount of crude off the market immediately. Natural gas futures fell around 7% on high supply levels and forecasts of warm weather in the U.S.

Gold futures fell around 0.7% on dollar strength today. Gold usually trades inversely to the dollar and with oil, which is exactly what happened during today's session. Strength in the dollar led to gold selling, as traders favored the U.S. currency over the metal. Declining crude prices also might have factored into gold weakness, as traders sold gold in-line with falling oil prices. Traders use gold as a safe-haven in the face of dollar weakness and rising oil prices. Copper prices fell nearly 2% on high supply levels around the world.

Grain prices fell across the board. Corn fell nearly 0.5%. Soybeans fell 0.4% on favorable weather conditions in South America, and wheat fell over 1% on good farming weather in the U.S.

Economic News
No major economic news to report for the U.S. today.