Has the Dollar Peaked?

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Treasury Secretary Hank Paulson's plan spells danger for the dollar, which, as the biggest currency in the world, retains its status as one of the most important calls in the murky seas of investing.

News, starting Thursday night, of US Treasury Secretary Hank Paulson's TARP - troubled asset relief program - boosted investment confidence across the world, inspiring some of the biggest one day rises in stocks and equity indices. But the plan also spells danger for the dollar, which, as the biggest currency in the world, retains its status as one of the most important calls in the murky seas of investing.

Pending final details, TARP requires the issue of up to USD 700bn in US Treasury paper. Already on Friday, the dollar index or DXY, which measures the trade weighted value of the dollar, was choppy, and looking distinctly weaker on Monday. Markets are questioning the potential volume of new US government debt, and the very rapid expansion of the balance sheet at the US central bank, the Federal Reserve.

... As the dollar index hit a low point on 15 July, so oil posted its record level of just under USD 150 a barrel, and gold, which has an especially intimate inverse correlation relationship with the dollar, hit an intermediate peak of USD 977.50 an ounce, close to its March records. Oil hit low points on 16 September, at just above USD 91 a barrel, and has now moved up sharply to more than USD 105 a barrel.

Speculators taking a bearish view on the dollar were possibly the main drivers that turned the gold price from its intermediate low of USD 746.47 an ounce on 11 September, to levels now approaching USD 900 an ounce. A number of technical analysts are now calling the dollar index overbought, and reckon that it has peaked intermediate-term.

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