Does The Dollar/Oil Link Still Hold?
In the most recent year, there has been a very strong correlation between the movement of the dollar against other currencies, particularly the euro, and the dollar price of oil. That link is of course not coincidental. If the dollar falls against the euro, then given a certain dollar price of oil, the euro price of oil will fall. This in turn means that for the global average price to remain unchanged, the dollar price of oil must rise, although not by as much as the dollar decline against the euro.
Yet during the last few weeks, the euro has fallen from its all time high of $1.60/€ to $1.548/€, a decline of more than 3%. Meanwhile, the dollar price of oil is up nearly 6%, from $119 per barrel to $126 per barrel. That means a quite dramatic rise in the euro price of oil, up from €74.5 per barrel of oil to more than €81 per barrel of oil, representing a 9% increase.
The fact that the price of the euro and oil have moved in opposite directions during the last few weeks would perhaps by some be taken as a falsification of the link between these two factors. But that would be mistaken. The link between the two is always a ceteris paribus link, i.e. the link is that all other things being equal a higher euro will also raise the dollar price of oil. But in the real world, all other things aren't equal. There have been two other things pushing up oil, two things which have overwhelmed the price lowering effect of the weaker euro.
First of all, monetary expansion will push up oil prices even without exchange rate effects. Because the price of oil is fully flexible, it will move up immediately in response to monetary expansion, and it will do so even if the exchange rate of the domestic currency does not fall against other paper currencies. Or to put it another way, assume that we had only one central bank and one currency in the entire world, a Global Monetary Union. Even though at that point there wouldn't be any exchange rate movements, any inflating by the Global Central Bank would push up oil prices disproportionately in the beginning as, again, oil prices are fully flexible in contrast to the much more sticky prices of the things we see in the supermarkets. And returning to the analysis of the current oil price, as we see not only the Fed, but the ECB and most other central banks inflating this is pushing up oil prices.
Moreover, some non-monetary factors have also been at work here, including almost constant reports of supply disruptions of oil from Nigeria.
In the medium-term, the tight supply conditions and inflationary conditions around the world should cause oil prices to continue to rise to new all-time highs( $150 or more is certainly not out of the question). However, there is a high probability of some form of short term correction considering how fast oil has risen in the last few weeks and months.
Yet during the last few weeks, the euro has fallen from its all time high of $1.60/€ to $1.548/€, a decline of more than 3%. Meanwhile, the dollar price of oil is up nearly 6%, from $119 per barrel to $126 per barrel. That means a quite dramatic rise in the euro price of oil, up from €74.5 per barrel of oil to more than €81 per barrel of oil, representing a 9% increase.
The fact that the price of the euro and oil have moved in opposite directions during the last few weeks would perhaps by some be taken as a falsification of the link between these two factors. But that would be mistaken. The link between the two is always a ceteris paribus link, i.e. the link is that all other things being equal a higher euro will also raise the dollar price of oil. But in the real world, all other things aren't equal. There have been two other things pushing up oil, two things which have overwhelmed the price lowering effect of the weaker euro.
First of all, monetary expansion will push up oil prices even without exchange rate effects. Because the price of oil is fully flexible, it will move up immediately in response to monetary expansion, and it will do so even if the exchange rate of the domestic currency does not fall against other paper currencies. Or to put it another way, assume that we had only one central bank and one currency in the entire world, a Global Monetary Union. Even though at that point there wouldn't be any exchange rate movements, any inflating by the Global Central Bank would push up oil prices disproportionately in the beginning as, again, oil prices are fully flexible in contrast to the much more sticky prices of the things we see in the supermarkets. And returning to the analysis of the current oil price, as we see not only the Fed, but the ECB and most other central banks inflating this is pushing up oil prices.
Moreover, some non-monetary factors have also been at work here, including almost constant reports of supply disruptions of oil from Nigeria.
In the medium-term, the tight supply conditions and inflationary conditions around the world should cause oil prices to continue to rise to new all-time highs( $150 or more is certainly not out of the question). However, there is a high probability of some form of short term correction considering how fast oil has risen in the last few weeks and months.
posted by stefankarlsson at 6:31 PM
1 Comments:
Stefan,
At a certain moment, some people will be exasperated by the rising price of oil.
At that or another moment, others will be exasperated by the falling price of the dollar
because it imports inflation.
At the latter moment, it will be the Middle Eastern countries
which peg their currencies to the dollar
which will call the shots on the ailing dollar's future,
says Liam Halligan this morning in the Sunday Telegraph
under the title “Beijing and Riyadh will call the shots on ailing dollar's future”
http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/05/11/ccecon111.xml
SNIPS
It's instructive that the main reason for the dollar's "recovery" has little to do with the US economy. The greenback's relative strength is less about the robustness of America, than the weakness of the eurozone.
+
And, anyway, the biggest problem for the US isn't the eurozone: it's the rest of the world - in particular China, the other emerging giants and the Middle Eastern countries which peg their currencies to the dollar.
UNSNIP
“The fact that the price of the euro and oil have moved in opposite directions during the last few weeks would perhaps by some be taken as a falsification of the link between these two factors”, says you.
OPEC wants value for its valuable product and the dollar-financial industry uses the opportunity to send the price through the roof and Juncker and the Financial Times are helping the dollar-financial industry.
http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/04/18/cneuro118.xml
+
The dollar danger is not over yet, Financial Times, May 9, 2008
In the US of A, angry oil consumers are taking aim at OPEC and are looking at a "scapegoat" instead of a needed mirror.
Clinton is pointing the finger at OPEC and saying that that’s not a market, but a monopoly.
http://afp.google.com/article/ALeqM5iqZOY9sLo1nPmNSYM3MqZjrebGTQ
I suppose she means the monopoly of the US dollar to denominate oil trade.
Why not use the immoral anti-trust laws and the World Trade Organisation to take on the US dollar and replace it with the GOLD-EURO?
This question should be tackled at the Dubai, June 15, GCC Currency Forum 2008.
http://bphouse.com/blaze/honest_money/2008/05/04/gcc-currency-forum-2008/
Once we will understand that the past three decades of cheap oil were possible due to the flow of cheap gold to SAMA, the Saudi central bank, the Oil Central Bank,
we will understand WHY the European Central Bank is transforming the euro to into the GOLD-EURO
by periodically marking its gold reserves to market.
We are faced here with a battle between the dollar-block and the euro-block.
At this hour, the euro-block, Juncker, is still prepared to help the dollar-block.
Also within the European Central Bank, some lunatics are still prepared to support the dollar-regime.
On Friday 12 May 2008, some lunatics within the European Central bank have indeed found nothing better to do than to jointly intervene with the lunatic US Fed to pump an extra $82bn into the banking system. http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article3864287.ece?Submitted=true
Starting with the question
“What is the rationale for the proposed unified currency within the GCC?”,
two senior figures involved in the European Union's currency union are to discuss
what lessons can be applied in the move towards a GCC single currency
at the GCC Currency Forum 2008 on June 15, 2008 in Dubai.
http://www.arabianbusiness.com/518278
http://www.itp.net/events/gcccurrency08/
It is to be hoped that they will urge OPEC to raise the price of oil
in order to punish those within the European Central Bank
who are still prepared to support the dollar-regime.
The support for that regime should immediately come to a halt.
By the same token, intervention in currency markets should be condemned so that oil can be priced in GOLD-EURO now.
At a certain moment, some people will be exasperated by the rising price of oil.
At that or another moment, others will be exasperated by the falling price of the dollar
because it imports inflation.
Ivo Cerckel
Post a Comment
<< Home