Commodities received a boost in October from the US dollar

New York (Platts)--4Dec2006

Commodities, having fallen from favor earlier this fall, received a boost
in October and November from an old friend -- the US dollar. Or, more
specifically, the weak US dollar. The greenback has been pummeled amid
rumblings that China, the second largest holder of dollar-denominated assets
may cut their exposure amid growing expectations that the US economy is coming
in for a landing, be it hard or soft.

On November 8 a Chinese bank official commented on his country's plans to
diversify its currency reserves. China currently holds more than $1 trillion
in US dollar-denominated instruments, the second-highest next to Japan. While
that tune has been sung before, the potential damage to the dollar's value if
China were to unload some of its holdings unleashed a relentless wave of
selling.

Concerns that the softening US economy may lead the Federal Reserve Bank
to slash the key lending rate from its current 5.25% level even as the
European Central Bank continues in hiking mode, has also taken a bite from the
greenback?s value. If the spread between US and European short-term interest
rates -- currently 2.0% -- should narrow, investors would likely to shift cash
across the Atlantic to higher-yielding instruments in Europe.

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