CME: Gains in Value of US Dollar Eroded

US - According to Steve Meyer and Len Steiner, US livestock and grain futures were for the most part higher on Monday despite reports of good harvest progress in both soybeans and corn (feeder cattle and bellies were the exception).
calendar icon 10 November 2009
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USDA reported a nice 12 point increase in the percentage of corn harvested, which currently stands at 37 per cent, compared to 25 per cent a week ago and 69 per cent last year (see chart below). About 75 per cent of the soybean crop is now harvested, a 24 point improvement compared to just a week ago and testimony to the advances in harvesting equipment.

Beef and pork wholesale values were flat to lower compared to Friday’s levels but that also did not seem to figure into the market rally. Rather, market participants appeared to follow the upward momentum in currency, equity and energy markets. Crude oil is now again flirting with $80 per barrel, the Dow Jones gained over 200 points and we again have to $1.50 to the Europeans for one of their €1 coins. Indeed, the US currency declined vs. most major currencies. It remains to be seen if the decline was just a knee jerk reaction to the US House of Representatives passing a $1.1. trillion health care bill.

Much of the gains in the value of the US dollar that we saw earlier in the year have been eroded and we are slowly returning to the all time lows established in the summer of 2008. There is plenty of debate about the weakness of the US dollar. Many economists will tell you that the decline in the value of the US$ is actually welcome, it means that money which was hoarded here during the financial crisis now is going back where it came from, a sign that the world economy is improving. A weaker US dollar also tends to make US goods more competitive, boosting US export demand and thus helping in the overall recovery. Others, on the other hand, are not so quick to jump on the “beat the dollar, beat the recession” bandwagon.

If all exchange rates were allowed to float freely, then the weak dollar would actually be good news. But the Chinese, which are now poised to surpass Japan as the second largest economy in the world, artificially fix the value of their currency to the US dollar, thus negating the exchange rate effect. The decline in the value of the US currency probably is good news for the US government since all the debt outstanding now is not worth as much.

But it is bad news for anyone, this writer included, who still is paid in US$. And it’s not just that all imported goods, crude oil included, become more expensive, although they do. It also means that US consumers have to pay more for US produced goods in order to compete for those goods with consumers in other countries. In this sense, the decline in the value of the US currency is a pernicious tax, and one that not many politicians will bring up in their rhetoric.

USDA will release on Tuesday morning, 7.30AM CST, the monthly ‘World Supply and Demand Estimates’, with updated projections for the current grain crops as well as revised forecasts for US beef, pork and poultry supply and use.

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