Banking on a dollar rally

Bill Jamieson

The stakes could not be higher in the deadly combat between soaring oil prices and the greenback

The period of benign neglect of the dollar was visibly brought to an end in early May following a meeting of G7 finance ministers and central bank governors. This registered official concern over the impact of ‘at times sharp fluctuations in major currencies’ on economic and financial stability.

Subsequent statements have helped to stabilise the dollar and then to support a stuttering rally against the euro. Jean-Claude Trichet, president of the European Central Bank, described the euro’s strength against the dollar as ‘worrisome’. In America there was also concern over the billowing US petroleum deficit. This had risen from 1 per cent of GDP in 2003, to 3 per cent by early 2008, more than wiping out the improvement in the non-oil deficit. Further remarks by Bernanke hinting that the Fed may need to raise interest rates to curb inflationary pressure – America’s inflation rate has jumped from 1.9 per cent last August to 4.3 per cent – sent the US currency sharply higher.

Since then, the oil price and the dollar have been in deadly combat. Policy preference is one thing, realisation quite another. The US is not the global price-setter that it was. According to the IMF, emerging and developing countries together generated around 70 per cent of world growth in 2007, China alone generating around 25 per cent. Since the start of 2005, China has accounted for almost all the increase in world demand for key metals such as aluminium, copper and zinc. And since 2000, around one third of the increase in world demand for oil has emanated from China. Every fresh upward move in oil has knocked the dollar back while signs of a price easing are seized upon as evidence of the dollar beginning to rally.

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Phi1 Edinburgh

July 14th, 2008 10:54am Report this comment

With the current crisis in American banks and mortgage providers the US Government will be taking on billions of mortgage debt - which means the dollar is going to fall not rise!!!!

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