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Dollar Weakness Drives Commodities Higher

The U.S. dollar is lower again because of expectations the Federal Reserve will start buying government bonds to try to stimulate their more than sluggish economy. Inflation is still at very low levels and no-one wants to hold the Dollar right now making gold and other currencies where interest rates are higher more attractive than the dollar.

Though the prospect of less bad debt and more cash in the financial system has driven stocks higher, the U.S. dollar has tanked recently and today we will get another taste of it when the CPI inflation data shows us where this market can move.

“The dollar sell-off has accelerated following the release of the latest set of FOMC minutes which had signaled that members are considering more unconventional measures to lift inflation expectations including introducing a price level or nominal GDP target,” said Lee Hardman at the Bank of Tokyo-Mitsubishi.

“Dollar holders’ anxiety over the potential implications of upcoming Fed policy actions has understandably ratcheted up another notch.”

The Dollar weakness has prompted Dollar denominated commodities higher with Gold reaching all time highs over the past few weeks and Oil driving back above $82 and heading towards the $100 mark again.

“We see prices progressing to the higher end of this range over 2011,” writes Ian Taylor, chief executive of Switzerland-based Vitol in the Financial Times. But he warned that surpluses in production and refining capacity would keep prices “in a relatively narrow band” next year. “The concept of a price ceiling exists today in a way that it simply didn’t when prices rose to $150 in the middle of 2008.”

Commodity currencies with high oil, gold or other reserves are likely to continue to benefit. The Canadian Dollar has broken parity with the Dollar for the first time in 6 months.

The dollar index, a measure of the Dollar unit against a basket of major global currencies, fell to its lowest level since December 2009 to 76.594, down from 77.061 in late North American trading Wednesday. This fall could easily be re-invigorated this afternoon with the CPI release scheduled.