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Commodities try to stabilize after recent plunge, but dollar's rebound weighs

May 14, 2011 |  8:00 am

Silver closed higher and gold closed lower on Friday as prices of commodities in general diverged, despite another jump in the dollar that typically would be expected to batter all or most raw materials.

Capping another wild trading week, near-term silver futures in New York added 22 cents, or 0.6%, to end at $35.01 an ounce. After plunging 27% the previous week as sellers swarmed, silver’s net loss this week was just 27 cents, or 0.8%. It bounced after falling as low as $32.30 on Thursday.

Gold fell $13.20, or 0.9%, to $1,493.40 an ounce on Friday, but was up a net $2.20 for the week.

Crb513 The Thomson Reuters/Jefferies CRB index of 19 major commodities (charted at left) ended nearly flat on Friday, with 10 of the 19 materials up for the day and nine down. The index was up 0.3% for the week after diving 9% the previous week.

Commodity bulls can argue that the market’s attempt to stabilize this week suggests that many investors are eager to jump aboard at lower prices after the recent brutal sell-off.

But market jitters seem likely to keep raw materials from heading off to the races again soon, some analysts say. “There are a lot of cross-currents that are keeping people cautious after being ‘all in’ before,” said Steve Platt, a commodities analyst at Archer Financial Services in Chicago.

One issue is the dollar’s trend. The greenback’s steep slide since August was a big part of what fueled the run-up in commodities, by making dollar-denominated raw materials cheaper for foreign buyers with strong currencies. What’s more, some U.S. investors flooded into hard assets, particularly precious metals, as a way to offset the dollar’s shrinking purchasing power.

Silver rocketed 57% from Jan. 1 to April 29, when it reached a 31-year high of $48.58 an ounce.

But the buck has bounced since the end of April. The DXY index (charted below) of the dollar’s value against six other major currencies rose 0.6% on Friday to 75.76. It’s now up 3.9% from the 33-month low of 72.93 reached on April 29.

Dxy513 Sudden weakness in the euro explains a chunk of the dollar’s turnaround. Renewed worries that Greece and perhaps other debt-laden euro-zone countries will end up defaulting on their bonds have helped knock the euro lower. Despite some upbeat euro-zone economic data on Friday the currency fell to a six-week low of $1.411, down from $1.425 on Thursday. It’s off 4.8% from its recent high of $1.483 on May 2.

The dollar also has snapped back in recent days against many other currencies, including the Swiss franc, the Brazilian real and the Russian ruble.

It just became too easy to be negative on the dollar. Whenever too many people crowd into the same trade it’s an invitation for the market to turn on them.

The U.S. currency may be benefiting from another cross-current: Fear that the global economy could slow significantly as China and many other emerging-market countries continue to tighten credit and as the Federal Reserve gets set to end its $600-billion bond-buying stimulus program on June 30.

If growth concerns mount more investors may rush into the dollar as a classic haven -- and rush out of raw materials.

On Friday, however, there was little urgency to flee most commodities even as the dollar rose.

After the volatility of the last two weeks, “It seemed like people were exhausted,” Platt said.

-- Tom Petruno


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