Dollar Surges, Bonds Fall on Sales Report

U.S. 10-year Treasury notes fell the most in 6
weeks today, after a government report showed that retail sales rose more than
expected last month. Bonds fell on the positive economic news, which lends
weight to bets that the Fed will not be forced to raise rates early in 2007.
Rather, the retail sales report set up a neutral atmosphere leading into the new
year. Investors have been focused on housing data for some time, using
housing market data as a gauge of the broader economic situation in the U.S.
With a weakening housing market, U.S. investors are turning to different sectors
to find support for the U.S. economy and dollar. Bonds initially shot
higher in late June, when the Fed initiated a rate-pause for interest rates to
deal with the overall slowing of the U.S. economy, and price has wavered near
9-month highs for nearly 3 months, as conflicting reports and Fed announcements
continue to roll in.

The dollar rallied against the euro and yen
today, moving to 3-month highs against the yen, after a positive retail sales
report was released in the U.S. The report showed that sales increased for
the first time last month since July, boosting widespread sentiment about the
U.S. economy. The dollar has been under pressure lately on continued
negative housing and manufacturing reports from the U.S., but today’s report
seemed to allow for some recovery. Europe is standing in the best light on
the global market; the ECB lifted rates for the last time this year last week,
but warned that rate hikes were not a guarantee early next year. Negative
reports have plagued Japan, and the BoJ sees little chance of a rate hike any
time soon. With this last retail sales report, broad sentiment towards the
U.S. economy has been pushed more towards neutral, but the negative housing
market will probably keep a lid on any huge dollar gains.

Crude oil futures closed with fractional change
today, giving up gains from early in the session. The Energy Department
released oil inventories, which showed a decline of about 1.3% in crude supplies
over last week. Despite the decline in reserves, crude supplies are still
around 13% higher than the 5-year average. OPEC has been calling for a
global international reduction in output, but has yet to produce any real
results to curb the falling price of oil. OPEC’s President has repeatedly
called for unity between its members in reaching a reduction of 1 million
barrels of crude a day, but the effects yet to be felt. Just recently a
scheduled meeting to discuss reductions has been postponed to late January,
highlighting the group’s inability to get together and effectively produce
results. Natural gas fell around 3% as traders bet that cold weather last
week caused a significant decline in gas reserves.

Gold closed down fractionally today. Gold
initially rose on speculation that higher oil prices would increase demand for
the metal, which is commonly used as a hedge against rising oil prices.
However, as oil prices fell through the day, so did gold, bringing the price of
the metal lower than yesterday’s close. The dollar’s rally on the global
market also helped to cap gold’s gains; gold price usually moves inversely to
the dollar. Gold was stuck today between a strong dollar and rising oil,
although oil eventually gave up its gains. Copper fell 2% today, to its
lowest levels in 6 months, after global inventories rose to their highest levels
in over a year.

Corn and soybeans both fell around 1% on
favorable farming conditions in Brazil and Argentina, which could boost global
supplies for the grains. Cocoa rose over 1% as civil and military unrest
continues to plague the Ivory Coast, threatening worldwide supplies.

Economic News

Retail sales rose 1% in November in the U.S., the
first increase in monthly sales since July.

John Lee

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