Banking on a dollar rally

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

As for the ECB, while it has repeatedly stressed its mandate to deliver price stability, it has to consider the impact on monetary stability of higher interest rates and growing economic divergence within the eurozone. While Germany’s economy performed better than expected in the first quarter, a rate rise would create serious problems in Spain, already reeling from a construction and property slump; in Italy, where the government is pushing for tax increases; and in France, which is now seeing a serious downturn in business activity and consumer spending.

Policymakers in Europe and America have one last escape card from this malign convergence of improbables: a sharp and sustained fall in the oil price. News that China has raised oil prices by up to 18 per cent sparked a fall in the oil price and a fillip in the dollar.

The balance of probability is that a demand slump will depress the oil price, triggering a strong relief rally in the dollar. That could be self-feeding if it is seen to contain the inflation threat and removes the prospect of a rise in US rates, enabling the Federal Reserve and the administration to concentrate on the continuing dislocation to growth caused by the credit crunch.

Without this prospect, the potential for currency market dislocation, particularly given the buck-passing that passes for G7 policy co-ordination, is considerable. In such an outcome, a debilitated dollar would be the least of our problems.

Bill Jamieson is executive editor of The Scotsman

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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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