Dollar and Oil Are Manipulated by ECB and Fed

Last week's very important shift in rate policy at the ECB, and its action to raise its key interest rate a quarter point, when taken in tandem with the fact that the Fed has reduced U.S. rates to a 2% low-point, should have further weakened the U.S. dollar. However, a clearly spoken non-bias by ECB President Jean-Claude Trichet, and Fed Chairman Bernanke's heavy on the hawkish commentary have successfully supported the dollar so far.

ECB Intentions Clear

It's very clear that the inflation-troubled ECB, which had telegraphed its impending move, also hoped it might keep further dollar softness in check. European producers are losing market share to competitively priced American goods, impacting the euro zone economy. Europe could bear this to some extent, since it allows for some lower cost goods to reach European consumers. However, it has been clear that the impact of cheaper American goods has been outweighed by an overall increase in the cost of living. The June jump in European inflation, as defined by the 4% HICP measure, presented impetus for the ECB to act. There was no longer time to wait for American economic stabilization if medium to long-term inflation was to be kept in check.

Fed's End of the Deal

At the same time, just a week earlier, the Fed stopped its expansionary campaign as it decided to hold interest rates steady. Our Fed, while keeping rates and capital cheap, also continued on its propaganda campaign to support the dollar with words. A steady stream of hawkish words have been born of Fed mouths, and more so as the ECB signaled what was to come last week. In its most recent policy statement, our beloved Fed stated that even though it still expected inflation to moderate this year and next, that uncertainty remained high as a result of commodity price momentum. The ECB said just about the same thing last week.

So, it would seem that the Fed and ECB are quite considerate of each other. The world's most developed and significant markets have much in common, and thus much to gain by working together to insure global stability. As each market flirts with recession, they both also face the same threat of inflation due to global demand stresses.

Unexpected Consequence

In the meantime, the key support for oil collapsed temporarily, which was certainly hoped for and perhaps even schemed by the central banks. Of course we are talking about the presumed demise of the dollar that nobody witnessed. When the dollar bought into central bank lobbying and held its ground, oil moved markedly lower. Still, its slippage only lasted until renewed geopolitical concern (read Iranian missile tests) jacked up oil again. The central banks can manipulate the markets all they want, but there's not much logic anyone can infuse into the Iranian mindset.

What Next...

Even so, the price of oil did not stage a remarkable comeback Wednesday on the Iranian news. It only snuck its head back up before collapsing again toward the end of the day. This leads us to make one of those predictions of ours. As we stated some weeks ago, oil should trade lower; we previously looked to a range from $125 to $135, if memory serves me right.

Momentum took crude higher, and, excuse the lack of technical description here, it just looked uncomfortable there above $141. We were even getting prepared to publish a "Sell Before $150 Trashes You" article. Demand destruction became apparent, and regulation is on the way to making oil trades less liquid. Yesterday, the Petroleum Status Report painted another heavy weekly draw from inventory, and oil could not even hold its ground. Heck, Iran fired off missiles and oil could not look up!

The momentum is looking the other way now, but here's where we make no sense... the same goes for the dollar. For this reason, oil should again find support before it reaches $125... and Iran is not going away. We see the dollar softening, and at some point, that should offer support to the cascading price of oil.

Central bank shenanigans can only fool the market for a short time. Despite all the hot air blowing, eventually the smart money will realize the ECB is raising rates, just as the Fed stopped cutting. The Fed remains tied to data, and basically handcuffed in the short-term. In other words, the dollar has to weaken, as long as it has not already overcompensated.

Ahead of the Fed meeting in August, the economy will be on its own as economic stimulus evaporates. We would bet against the dollar and avoid oil all together for now, because a congruence of momentum unwind for oil is countering the factor of dollar demise. If you need something to do with yourselves, we have another suggestion to use against the dollar, gold.

Disclosure: None

Comments

[Dan Walker]

I don't think you appreciate the degree of demand destruction going on in the states. I drove past a major lake on the 4th of July, and saw one powerboat. Oil rose $2 and fell back down after Iran launched 9 missiles. Watch oil prices today as they just fired 9 more. The futures traders are rolling their contacts forward a week before expiration and holding down deliveries as tankers build up in harbors. Sooner or later they will end up with their heads handed to them on plates. Couldn't happen to a nicer bunch of guys.

[fxtrader07]

sorry, but i don't quite get your point. if anyone is manipulating the price of oil, it's the big banks like goldman, large hedgefunds and Iran/saudi arabia. the Central banks have nothing to gain from that and contrary to what some believe they are not omnipotent to influence each and everything at will.

[paultaut]

US oil inventories are at 25 year lows.

US demand destruction? What demand destruction?

Did you travel anywhere over the Fourth of July, the highways were just as filled with trucks and cars as ever, just not as congested as before. Vacation plans were set in stone months ago: time off, bookings to resorts, etc.. These type of plans will not be altered this year. Next year, yes, but not this year.

Lets see, have you insulated your home? If you lived through the 70's embargo, yes you have. Have you installed energy efficient aplliances? I have Energy efficient cooling/heating already in place. Refrigerator/stove? Yes and Yes.

The only way demand destruction will have any effect is if usage can go down by 10% or more over the next 12 months...thats 2+ million barrels for the USA.

Sell your high priced Suv and Mini's, to whom? Scrap maybe? How are you going to pay for the smaller cars?
Home equity? Credit Card?

Your job may be on the line.

The only way demand destruction has a chance is for a Global Recession and I say there is no Government on Earth that will stand by and allow it in their respective countries.

You want Demand Destruction. DO NOT BUY a HDTV Plasm or LCD. They Use 2 Times The Energy that your Refrigerator does and its always ON.

[WallStreetGreek]

What I mean by ECB and Fed manipulation:

I mean, they are doing their best to offset the impact their actions would have on the dollar and oil, by talking tough. The ECB is raising rates, but at the same time saying it might not next month.

The Fed just finished a huge expansionary campaign and has forecast inflation would moderate; in the meantime, it's talking up inflation concerns.

Both the groups are talking against their actions, because they face two separate enemies, recession and inflation at the same time. Talk is cheap though! The market is smart. The lobbying can only hold off the flood for so long. Soon, the dollar will wither despite the central bank hot air.

This shows how close the Fed is to losing control of this ship.

[SOTOS]

My personal opinion is that the war against Iran is going to be a reality soon. Seems like what happens in the crude oil market is not just speculation. My personal opinion is that the oil is going to hit $230. I hope and i pray not to happen but....

[theinvestingspeculator]

The Fed reserves the right to intervene in any market any time. You will never hear about it.

[sivere]

We are in a situation where our financial system is choked to a near stop due to a bursting $700 trillion + ( notional) derivatives bubble, plus energy prices are soaring (fueled further by a declining dollar- all these related to the first point. If we wnat to save our selves and our country, we need to get congress to:

RevokeTheFed.com
xFed.mobi (mobile users)

[carey_jim]

Welcome to world history and the end of American hegemony.

[flow5]

The power of the FED to manage the exchange value of the dollar is marginal at best. Only insofar as the US reverses the direction of the current account balance will the dollar rebound. But this Herculean task is unachievable in the short-run and the requirements for turning the tide in the long-run will never gain support.

[SOTOS]

We are not ''investors''..we are not ''traders''...we are just...''slaves''...FE... slaves

[GMiki]

We're all on about the same page here--things don't look so hot. :) By the way, we're past peak oil and that DOES have an effect, even if people aren't using their motorboats so much these days.

God forbid we have another war. Our youth are not really that expendible--not to mention the Iranians, who are not at fault for what their stupid government has subjected them to.

[J Lee]

I predict that oil is going to hit 150 at some point, and 200 at some point and 100 at some point and 500 at some point. OK, so now that we have that straight, does making silly predictions do anything for anybody? You need to have some magnificent econometric model for it to mean a hill of beans. And unfortunately even the economists don't have such a model. They certainly do have models but nothing that is nearly sophisticated enough. And certainly nothing so far that is connected with reality.

[iThinkBig]

America is becoming protectionist and will rebuild the hard way. I don't worry all that much about the Iranian puppet proxy. If war is a concern, look at China discontinuing subsidies to North Korea for the next major flashpoint that could turn into your WWIII scenerio.

The youthful partyers of the Roaring Twenties became our responsible national leaders by 1946. History does and will repeat itself. I don't need a econometric model to tell me, 10,000 years of written human history tells me we are at the last stages of global consensus and to reach it, one last big one will occur (think warring villages, then city-states, then nations, then several blocs of nations warring, now down to 3 basic blocs jockying for hedemony).

A lot of perceived wealth was vaporware, with those in the know skimming off it and purchasing hard assets of long-term value (commodities). Now this will deflate soon along with the rest of the current U.S. asset classes. Again, history tells me so. Nothing new under the sun for mankind's behavior.

Ass-backwards government will continue to ignore fiscal reality and play games for the next four years making it worse, until new, unbribed leadership make it into office around 2012.

By then, we will have brought enough alternatives such as plug-in/nuclear and still have enough domestic oil supply to rebuild manufacturing and be somewhat prepared for global warfare scenerios (if such occur).

Coincidentally, man knew our destiny thousands of years ago (and some of us current) in what many call prophecy (statistical probability).

Man's destiny is an evolution where our genetics were tampered with a long-time ago. Our evolution is to become energy and lift the restraints of gravity, time and space which are stifling and creating the boredom and game playing throughout our history.

Restoration of that destiny is assured and is indeed occuring as we speak. This is occuring through science and technology, but certainly not as many apocalyptic religions preach. But if you choose Christianity as a model for learning then read the entire bible on your own to see the plan and realities surrounding mankind.

Rest easy friends, we have some heavy lifting to do but we'll make it through the next decade of turbulent times and those who don't have there hands over there eyes and ears as part of this group as the responsible investors we are will not only survive it, we shall make the rules and prosper greatly for our service afterwards.

From an investment perspective, this is starting to become a good playground to buy assets for pennies on the dollar for those whom held cash and paid attention. There is a silver lining in every cloud :)

[secmaven]

iThinkBig...our destiny is Chris Angel

[elwind45]

We have come a long way in this fiat. What you say we continue this parade? We can only hope that our " friends" continue to finance our inflation machine! Any short term deflation will be followed by massive inflation 6-12 months out. Right now natural rates are up, and there are plenty of reasons to continue bumping them up. Growth is going to give up the "ghost" before this mess is over!