Today is seeing world markets reacting to a surge in the U.S. dollar. The DXY dollar index is well above 83, as the greenback rockets higher. The surge in the dollar allowed the yen/dollar to break the psychologically important 100 yen level, taking the yen to a four and a half year low, and boosting the Nikkei stock index to a five and a half year high. The drop in the yen is going to upset other exporting nations in Southeast Asia. Coming as this does on the heels of yesterday's surprise interest rate cut by the Bank of Korea, we may be looking at a regional currency war. The drop in the yen also led U.S. officials to warn Japan over currency devaluation this morning.
Part of the dollar's sudden strength is being attributed to unsubstantiated rumors last night that the U.S. Federal Reserve may take the recent better than expected employment numbers as an excuse to cut back or even stop the $85 billion a month in bond and mortgage purchases of its quantitative easing program.
As the dollar does a Hulk impression on commodities today, gold was smashed below the $1,445 level, which triggered some sell stops. COMEX gold futures for July delivery were down as much as $41 an ounce, while spot gold was only down as much as $29.60 an ounce, showing a larger divergence than normal.
Some pundits have been predicting a "decoupling" of physical gold prices from futures contracts. The recent unprecedented global gold rush for physical gold when prices collapsed in mid-April was seen by some as validation of this theory. However, physical demand is unable to maintain that level of purchases indefinitely, and the leveraged nature of "paper gold" means that it will continue to influence the overall price of the precious metal.