Risk-Off Trade Sends U.S. Dollar Higher

In search of a safe haven, investors are flocking into the U.S. dollar Tuesday and out of risk assets including commodities.

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Concerns about the ongoing situation in Greece and the euro zone as well as perceived weakness in the global economic recovery are some of the drivers.

“Despite the fact that China downgraded its growth forecast Monday amid concerns about a double-dip in Europe, markets have today decided — somewhat belatedly — that this is a bad thing, and have turned sharply lower”, writes Michael Hewson, CMC Markets UK Sr. Market Analyst. Stocks opened weak in the U.S. markets and continued to slide throughout Tuesday morning.

In the precious metals complex gold , silver , platinum and palladium all sold off as the dollar strengthened.

“Gold is trying to anticipate something in the geopolitical monetary story,” says Richard Hastings, Global Hunter Securities Macro Strategist. Investors are worried “that the dollar would be exclusively strong” and are lightening up on other dollar based assets including gold.

But Hastings also sees this as an opportunity writing that there is “strong support” at $1,550 and that “gold would recover from any major setback”. Hastings sees gold trading in a range of $1,550 to $1,900 per ounce for calendar year 2012 — up from an earlier forecast of $1,450 to $1,750 per ounce.

But, one contract managed to rally in the soft commodities complex. After trading limit up on Monday, cotton futures initially followed other commodities lower on the strong dollar but regained its footing later in the session. Cotton markets were roiled this week by an export ban on the commodity in India. India is the second biggest exporter of cotton in the world and China is its primary destination.

“If this embargo out of India is a sustained event, then the low of the year is in for cotton,” says Rich Ilczyszyn iitrader.com CEO and founder. It is “potentially one of those situations where demand could outpace what we have in stock.” Ilczyszyn says that investors that needed to cover shorts or get long on Monday when the market was lock limit up were active in the options market.

A smaller and less speculative market than oil or gold, global demand and production are the primary drivers of cotton prices.

Sudakshina Unnikrishnan, Barclays Capital Commodities Research writes:

Cotton prices have been trending lower over the past year after hitting an all-time of $2.27/lb. a year ago, with the decline driven by 2011-12 global production rising markedly, with South Asia the source of the largest year over year growth in production. Global cotton inventories are likely to rise almost by a third year/year, taking inventories to a two-year high and providing a buffer to the market.

The biggest impact of rising cotton prices, says Unnikrishnan would be on Chinese manufacturers, and textile mills.

Monday’s ban is the second time in nearly two years that India has banned exports of cotton due to supply concerns.

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