2003: DOLLAR EXTENDS DAMAGE, COMMODITY CURRENCIES SOAR

The major differences distinguishing the global economic/market environment surrounding the 2003 dollar sell-off from that of 2002 were (1) the breadth of the commodity rally; (2) increased geopolitical uncertainty weighing on the U.S. dollar and U.S. assets after the outbreak of the Iraq war; and (3) deteriorating budget deficit and current account deficit balances. Prolonged interest rate cuts by the Federal Reserve to a 45-year low of 1 percent also accelerated the dollar decline and boosted commodities as the Fed vowed to inject the liquidity to allay the risk of deflation. This readiness to debase the currency via aggressive rate cuts and injection of liquidity was likened to dropping money from helicopters, a metaphor that would earn its author, former Fed Board governor Ben Bernanke, the moniker “Helicopter Ben.” The Fed’s so-called reflationary monetary policy—boosting liquidity to lift inflation above zero—was a significant negative for the U.S. dollar and a windfall for commodities as investors fled the low-yielding currency for the high-growth commodities as these appreciated against their principal invoicing currency. Continue reading →