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Strong Dollar seen for 2012

Updated: 12/28/2011 @ 12:02pm

In any given year, one might think that as China goes, so go the corn and soybean markets. But, as the European debt crisis continues to make global markets uncertain, the direction of the U.S. Dollar and its impact on grain prices is being heavily watched.

"If you are looking for clues to the price potential of your crop, start by looking at the political stability of a government," Kevin Hughes, an independent currency trader says.

A nervous main street and shaky equity markets create a stronger Dollar, a negative factor for the farm markets.

To follow the direction of the U.S. Dollar, one needs only to watch the relationship between the Euro Dollar and U.S. Dollar currencies. For instance, if the dally news reports show that EUR/USD is up 20 points, the translation would be that the U.S. Dollar has weakened. If the EUR/USD fell 20 points, then the U.S. Dollar strengthened for the day.

In general, a strengthening U.S. Dollar will make U.S. commodities more expensive on the world market. Thus, grain prices are pressured downward. When the U.S. Dollar is trading lower, U.S. farm markets tend to be underpinned.

Dollar Moves On Fear

Risk, or fear can move the U.S. Dollar. "When investors become leery of the stock market and are ready to pull their money, they will buy the U.S. Dollar. Therefore, when the Dow Jones Industrials ends any given day lower, the Dollar will rise," Hughes says.

Political uncertainty is a second factor to which the U.S. Dollar and Dow reacts.

On Wednesday, the Dollar Index continued its upward bounce off the green line 20-day moving average and posted new highs for the year overnight, John Roach, Roach Ag, wrote in a daily customer newsletter:  "Money is leaving where it has been, especially from the Euro, and moving toward the perceived safe haven of the United States," Roach stated.  

Dollar Outlook

In recent weeks, speculators have been net-short the U.S. Dollar against the Euro, according to the Commodities Futures Trading Commission.

In a seasonal fashion, those investors are expected to unwind their positions as the end of the year approaches, strengthening the U.S. currency.

"On a fundamental basis, I see the U.S. dollar against the Euro dollar strengthening for the next three months, due to the implosion of the euro zone and its ongoing debt crisis," Hughes says.

Jack Scoville, PRICE Futures Group vice president, says the Dollar Index, watched by Chicago traders, could have made a big low in 2010. "The dollar was artificially strong until George W. Bush came into office. It probably got too cheap in the last year.  Now, it will find a place to trade and then trade sideways for an extended period," Scoville says.

Though it could stall out at $82.00, the Dollar Index is seen running as far as $86.00, Scoville says.

The Dollar Index is more than half-weighted with euro dollars.

In summary, the Dollar has been acting like a meat-head in a weightlifting room, Hughes says. "With its chest puffed out, it's the strongest thing out there right now."

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