"The US Dollar And The Price Of Oil Connection"

Tue Aug 5, 5:38 PM ET A sheet of one dollar bills. The dollar received a boost Tuesday as the Federal Reserve kept its key interest rate on hold at 2.0 percent citing lackluster economic growth and inflationary pressures.(AFP/File/Shawn Thew)

The dollar received a boost Tuesday as the Federal Reserve kept its key interest rate on hold at 2.0 percent citing lackluster economic growth and inflationary pressures.

Some traders cautioned that the dollar could fall back in coming days on possible profit-taking, especially as eurozone rates are predicted to remain higher than US rates for the foreseeable future, offering a better potential return than funds invested in US markets.

The single European currency was swapping hands at 1.5454 dollars around 2100 GMT, down from 1.5580 late Monday.

The dollar gained against the Japanese currency, rising to 108.36 yen from 108.25 a day earlier.

"The US Federal Reserve left the fed funds rate unchanged at 2.0 percent as widely expected by the market," said Antonio Sousa, a chief strategist at Forex Capital Markets.

"Today's FOMC (Federal Open Market Committee) statement was clearly a disappointment for many market players and the recent strength in the US dollar may easily evaporate in a wave of profit-taking," Sousa said.

The dollar has weakened in the past year amid faltering US economic growth, but it has picked up strength of late as US growth, buoyed by a giant 168-billion-dollar economic stimulus, has shown signs of improvement.

Some traders expressed hope this could open the door to the Fed eventually hiking rates, but the central bank gave no indication it was moving to such a stance Tuesday saying it remained worried about inflationary pressures.

Analysts nonetheless are not predicting that the Fed will hike its federal funds rate any time soon and say this could temper the dollar's recent rise, especially as eurozone rates remain elevated.

The European Central Bank is expected to keep its main lending rate pegged at 4.25 percent on Thursday, partly in a bid to temper inflationary pressures.

"When riding a bike, one of the most difficult things to do is to balance while trying to stay still," said analyst Daragh Maher of Calyon.

"In a way, that is what the market is trying to do so far this week, waiting for the central bank announcements but trying to gauge how best to balance in the meantime.

"For now, standing still may be enough to ensure that the dollar advances. After all, most other economies appear to be sliding backwards."

Oil traders sent crude prices tumbling as low as $118 a barrel Tuesday on the growing belief that a U.S. economic slowdown and high energy costs are curbing consumer demand for gasoline and other petroleum products.

Crude oil finished the day just above $119 a barrel — its lowest settlement price since early May.

"The market psychology has finally shifted," said Stephen Schork, an analyst and trader in Villanova, Pa., adding that "$4-a-gallon gasoline has clearly killed demand."

The dollar's six-week highs against the euro also contributed to oil's decline Tuesday. The euro fell to $1.5464 from the $1.5587 it bought late in New York trading Monday, making oil and other commodities less attractive to investors seeking a hedge against inflation and dollar weakness.

The immediate cause of rising oil prices is the weak dollar. Oil-producing countries are requiring more dollars to purchase the same barrel of oil because the dollar is worth less today than it was a few years ago. Anyone who travels abroad knows about the weak dollar. In 2000, it took $1 to purchase one euro.

Today, it takes close to $1.60 to purchase a euro. A Canadian dollar is now worth the same as a U.S. dollar, whereas eight years ago it was worth considerably less than an American dollar.

And why do we have a weak dollar?

You can start with the economic policies followed by the Bush administration. During Bush’s 7½ years in office, we have maintained large trade deficits with the rest of the world and run up large domestic budget deficits to pay for our misadventure in Iraq and large tax cuts for the wealthy. Also, according to a monograph recently issued by the Center for American Progress, the Federal Reserve’s low-interest policy has caused a 14 percent decline in the value of the dollar since last September.

The center estimates that “nearly 40 percent of the increased price American consumers are paying for oil is attributable to the weak dollar,” even after factoring in the effects of increased global demand from countries such as China.

So what are we to do?

First, the public should demand that Congress pass comprehensive energy policy that adequately addresses both the demand side and the supply side of the issue.

Second, the public should demand that the next president follow economic policies that shore up the value of the dollar rather than run up big trade and budget deficits. Foreign producers will continue to raise the price of oil as long as the value of the dollar continues to drop.

Some may want to beat up on Congress for not acting more boldly now on energy policy. But don’t forget it’s “the man behind the curtain” and his Republican allies in Congress who pursued economic policies that have devastated the value of the U.S. dollar. When the history of this disastrous administration is written, the weak dollar should join the war in Iraq and Hurricane Katrina on the list of the effects of abysmal policy failures.

    American consumers are happy about the almost forty cent drop in the price of gas recently. What gives? Several factors are in play in the falling price of crude and commercial oil. One is simply Americans consumers are using less gas. Four plus a dollar gas will do that. Secondly the the Fed has stopped lowering the bank interest rates thus not flooding the economy with "easy credit" (which cheapens the dollar). Conversely the stronger the dollar the less oil costs, because oil is sold in the dollar currency.

The year was 1971. On August 15 of that year, president Richard Nixon officially ended the Dollar’s link to gold, which had been the policy of the U.S. government since 1789. At the time, the Dollar was worth 1/35th of an ounce of gold, as it had been for the previous 38 years. When OPEC sold its oil, it was, in a sense, receiving gold in return. That was the idea, anyway.

In September of 1971, only a month after Nixon pulled the rug from under them, OPEC gathered to decide what to do about the Dollar’s declining real value. In Resolution XXV.140, they decided that: “[OPEC] Member Countries shall take necessary action...to offset any adverse effects on the per barrel real income of Member Countries resulting from the international monetary developments of 15 August 1971.” Eventually, this took the form of higher prices, as it took more and more depreciating dollars to buy a barrel of oil.

Today, OPEC is faced with a similar problem. They take dollars for their oil, and these dollars often end up buying Treasury bonds. Also, their own domestic currencies are linked to the Dollar, which is causing domestic inflation.

    As I see it, the next Congress and President, will need to open their eyes to the need to strengthen the dollar by, at the minimum, withdrawing from Iraq as fast as possible (or better yet adopting the Libertarian party policy of withdrawing the military from all foreign soil), turn the American economy around from being the "debt based" economy the Fed wants America to be into a "production and commodity based" economy where the dollar has real value instead of being "fiat currency" (the unconstitutional Federal Reserve Banking system being abolished will go a long way to achieving that objective). A strong dollar equals a strong America with cheaper gas and oil, as I see it.

tags: the dollar  the price of oil  the economy  business  capitalism  bush  the fed  

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