Dollar likely to slump as gold climbs

Oil is also due for rise, and questions about bailout package could weaken the US currency.

Gold is viewed as a safe haven in times of economic stress.

The US dollar is likely to slump further this week, analysts say, supporting price gains for gold and oil as Congress chooses to either widen the government's deficit by hundreds of billions of dollars with a bailout or risk a further meltdown on Wall Street. Oil prices eased slightly yesterday, falling by 98 cents to US$108.39 a barrel for November delivery, but the decrease came a day after the largest jump in the price of West Texas Intermediate (WTI) crude in history. Gold for December delivery fell $2.20, to $906.80 an ounce, after gaining more than $44 on Monday.

Chip Hodge, a managing director at MFC Global Investment Management in Boston, said questions about the size of the proposed relief package and its effect on the value of the US dollar would steer the price of oil in the short term. "My guess is the weaker dollar trade is likely to overwhelm fundamentals," Mr Hodge said. "We're talking about this large obligation that no one can really quantify." Uncertainty about the dollar outweighed concerns that growth in world oil demand could slow as a result of an economic slowdown, he said.

"There needs to be more stability in the financial markets for the fundamentals to come out and play," he said. The same was true of gold, which had steadily moved in an inverse relationship to the value of the dollar, said Dalton Garis, an associate professor of economics and market behaviour at the Petroleum Institute in Abu Dhabi. Gold is viewed as a safe bet in a time of economic uncertainty, and the price of the precious metal increased last week by 14 per cent as the financial crisis in the US deepened.

Monday's $16 jump in the oil price was widely ascribed to the expiry of the WTI contract for October delivery and the ensuing rush of short-sellers to cover their positions. "It was a classic short squeeze," said Prof Garis, who noted that such dramatic changes had been observed before with other commodities. "It was beautiful." A "short-seller" borrows futures contracts from a broker and immediately sells them to traders on the hope that the price will fall. He then buys the contracts back again either when the price has decreased or the contract is about to expire, forcing him to "cover" his position by returning the oil contracts to the broker.

Towards the weekend, a number of short-sellers took positions with the belief that poor economic news from the US would cause oil prices to continue their weeklong decline. In trading on Monday morning, however, the fall in the value of the US dollar and speculation about the US government bailout initially pushed oil prices upwards, Mr Garis said. Traders held onto contracts as the expiration deadline loomed, forcing short-sellers to pay much higher prices to buy the contracts back and cover their positions.

The result was a record gain in prices. "This was expiration day. You had to settle, or you had to deliver the oil," he said. "Speculators lost money." Mr Garis pointed out that the price of contracts for November or December delivery did not change nearly as much on Monday, meaning some degree of market manipulation of the October contract had taken place. Mr Hodge said he would not be surprised if at least one short-seller had "imploded" in the mêlée.

The US Commodity Futures Trading Commission (CFTC) announced late on Monday that it would investigate the day's trading activity. "CFTC surveillance and enforcement staff are closely monitoring [Monday's] large movement in the price of crude oil," said Walter Lukken, the CFTC acting chairman. "We are working closely with Nymex [New York Mercantile Exchange] compliance staff to ensure that no one is taking advantage of the current stresses facing our financial marketplace for their own manipulative gain."