A falling U.S. Dollar has favored gold and gold stocks on the TSX Venture in recent weeks. The sell-off in the Dollar was abruptly stopped Tuesday after some hawkish Fed comments from New York Federal Reserve President William Dudley. In a twisted almost pathological game of cry wolf, Dudley boldly warned that a September rate hike “is possible.” Does anyone still believe this guy? Apparently, the markets do, as the U.S. dollar swiftly corrected.

U.S. dollar Index – 5 Day Chart


image source: http://www.marketwatch.com/investing/index/dxy

At some point, investors are going to ask themselves: how many times have we been here before?

The idea of the Fed raising rates in September, two months before the general election borders onpreposterous. So, while the Fed won’t raise rates before the election, the moment is coming when the Fed will be forced to push the economy into a full-on recession or risk the continued collapse of the U.S. dollar.Those are the only two options left. The Fed talked itself into a symbolic rate hike in December of 2015 and may do it again. When comments such as the ones delivered by Dudley today fall flat and investors continue to sell the Dollar, the real crisis will emerge.

Zero Hedge read between the lines Tuesday morning, adding some truth to the reasons or happenings behind Dudley’s empty threats:

“The Fed only raises rates when the economy is doing well,” (apart from in Dec 2015?) Dudley exclaimed that “10Y yields are pretty low given the circumstances” (so sell bonds), and that “the market is complacent about the need to gradually hike rates and the time for a rate hike is edging closer.”

Click here to read US Dollar Jumps As Hawkish Dudley Says “September Is Possible.. Market Underpricing Rate Hikes”

Dudley’s comments are actually quite bearish in some respects and represent more ‘tough talk’ or pandering to the real monetary hawks. In a bout of deja vu, Dudley warned, “We’re edging closer towards the point in time where it’ll be appropriate to raise interest rates further.”

My personal favorite is Dudley’s interpretation of the U.S. economy which he describes to be in “OK shape”.

To read more quotes from the New York Fed President, click here.

Don’t believe Hawkish Fed Talk

Core CPI, which excludes food and energy rose 2.2% year over year in July. The Fed has long argued it can and will raise rates when inflation picks up. The 2.2% inflation rate in July was below the 2.3% expectations; however, it remains above the Fed’s 2%-mandate for the 9th straight month. Clearly, some of that cheap paper is finding its way into areas of the economy. With fuel prices still low, it will take major inflation moves to force the Fed to act.


image source: http://www.zerohedge.com/news/2016-08-16/core-cpi-remains-above-fed-mand…

Despite the stabilization of the U.S. dollar today, the Bloomberg Commodity Index moved 0.44% higher to 85.61 Tuesday morning. The Fed’s tough talk will not last as data continues to turn negative and it looks to ease not raise interest rates. Look for the U.S. dollar to resume its downtrend and for commodities to rally in the weeks ahead.


This article represents solely the opinions of Alexander Smith. Alexander Smith is not an investment advisor and any reference to specific securities in the list referred to in the article does not constitute a recommendation thereof. Readers are encouraged to consult their investment advisors prior to making any investment decisions. The information in this article is of an impersonal nature and should not be construed as individualized advice or investment recommendations.