The US dollar rose to a six-month high against the euro yesterday as gold prices tumbled to a 2008 low and oil slipped, leading investors to increase bets on easing inflation and slower global growth.
The euro tumbled below $1.48 to the lowest since February, extending losses after data released on Thursday showed the eurozone economy shrank in the second quarter for the first time since records began being kept in 1995.
Five of the Group of Seven rich nations have experienced economic contraction this year, underscoring the dollar's relative attraction with growth still holding up in the world's largest economy and dragging crude prices back below $114 a barrel.
"A lot of investors who have been buying commodities, not just on a global growth story but as a hedge against a weak dollar, are unloading those commodities based on a much more constrained global outlook and going back into the US dollar," said Tony Morriss, senior currency strategist with ANZ Bank in Sydney. US light crude futures edged below $114 a barrel, with investors feeling more confident that a ceasefire in hostilities between Russia and Georgia would hold. Since hitting an all-time high of $147.27 a month ago, oil has lost a fifth of its value as deep-seated worries about slowing demand from big consumers like China.
A 1.5 per cent decline in gold prices to $793.95 an ounce in the spot market caused a landslide in other metals prices, with silver plunging 8.7 per cent, on track for the largest daily decline since March.
"We'll have some people targeting $750, but I think we would need to see a continuation in that dollar strength to give it sufficient momentum to head that way," said Darren Heathcote of Investec Australia in Sydney.
Asian equity markets edged lower as sentiment continued to struggle as investors factored in to what extent potential recessions in Britain, Europe and Japan would hit corporate Asia's bottom line. However, currency weakness has not had good track record of foreshadowing stock market strength.
"History shows a strong and consistent correlation between weak currencies and falling stock markets," said Garry Evans, Asia-Pacific equity strategist with HSBC in Hong Kong.
"Weak currencies are a symptom of a deeper problem - slowing economic growth, out-of-control inflation or structural issues - that reduce the attractiveness of equities," he said in a research note.
Outside of Japan, stocks in the Asia-Pacific region slipped 0.3 per cent, heading back toward a 17-month low plumbed on Wednesday, according to an MSCI index.
The hallmark trade of the past year, betting on strength in raw materials prices because of solid growth in developing countries while selling off the unstable financial sector, has been seriously tested in recent weeks as the US dollar showed sustained strength.