Futures File: Fed rate hike sends dollar climbing

23 Dec 2015 | Author: | No comments yet »

Gold futures finish with a weekly loss of 1%.

At least for the short run, the Federal Reserve’s interest rate increase has created one clear winner: the banks. February gold GCG6, +1.52% gained $15.40, or 1.5%, to settle at $1,065 an ounce on Comex, a day after sinking to its lowest settlement since 2009 Thursday. When the Fed announced on Wednesday that it would raise its benchmark rate to a range of 0.25 to 0.5 percent, banks raised the rates they charge on many loans but not the rates they pay to depositors. But the yellow metal saw a weekly drop of 1%, its eighth weekly decline in the last nine. “We still maintain our long term view is bullish for the yellow metal because there [are] just so many events which can derail the global growth and volatility could pick up immensely,” said Naeem Aslam, chief market analyst at AvaTrade.

Also, “we have the longest bull rally for equities since the World War II, and this itself is another reason to play safe and what else could be a better option than holding the yellow metal.” “Gold remains heavily bearish and bears have been gifted an opportunity to install another round of selling momentum throughout metals before the end of the year. The unemployment rate has held steady recently, at 5 percent, but the underemployment rate — which includes the unemployed, part-timers who need full-time work and jobless workers who have apparently given up looking — is still at nearly 10 percent. With any hopes of a recovery in prices discounted, further dollar appreciation should send this zero yielding metal back towards $1,046 [an ounce] and potentially lower,” said Lukman Otunuga, research analyst at FXTM in a Friday research note.

With no evidence of inflation in wages or in consumer prices, there was simply no need at this time for the Fed to risk slowing the economy by raising rates. It had climbed 0.5% a day earlier in the wake of the Fed’s decision Wednesday to lift benchmark interest-rates by a quarter of a percentage point—the first increase to the fed-funds rate in nearly 10 years. For most of the past several decades, Fed policy makers tended to indulge these fears by giving priority to fighting inflation, even when doing so stifled jobs and wages.

Higher rates strengthen the attractiveness of the dollar, boosting the return of deposits in that currency, while making dollar-based assets more expensive to investors using other monetary units. January platinum PLF6, +1.73% added $16.10, or 1.9%, to end at $860.80 an ounce, with a 2% weekly gain, while March palladium PAH6, +0.00% tacked on $1.50, or 0.3%, to $558.95 an ounce, scoring a 2.6% weekly climb.

Recent comments by Janet Yellen, the chairwoman of the Fed, indicate that the increase is more to appease inflation hawks than to definitively change course. In fact, the risk that wages will continue to stagnate — as they have for decades for most people — should be a far more worrisome issue for policy makers than a distant and theoretical risk of inflation.

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