Dollar Hurt by Geopolitical Concerns and High Oil

Oil prices are driving the currency market. Over the past 2 days, prices have increased more than $10 a barrel. As a result, the US dollar has weakened across board, particularly against the Australian and Canadian dollars. The AUD/USD even hit a new 25 year high this morning.

For the greenback, politics is trumping economics as fears that Israel may attack oil rich Iran makes traders jittery. This fear is also reflected in gold prices which is near a 3 month high. Flight to safety is the market’s top priority with geopolitical risks on the table. Even the better than expected US trade balance numbers could not help the dollar, because the sentiment in the market is very dollar bearish.

Oil prices drove the import balance higher, but a weaker dollar helped to drive exports up 0.9 percent. This wasn’t a big surprise since the export component of the manufacturing ISM report already clued us into the possibility of a strong report.

With oil determining monetary policy, the fact that they are within a whisker of the record highs will keep most central banks hawkish. Consumer confidence will probably remain weak as $5 gasoline becomes an increasing reality for drivers around the country. However watch out for a big surprise in the dollar next week with retail sales due for release.

Comments

[naturalsol:]

? backwards, again.

2008 Jul 11 10:57 AM

[Sophisse:]

It does seem like question of which is the cause, which is the effect, is worthy of some comment.

2008 Jul 11 01:34 PM

[Ames Tiedeman:]

The Dollar will not be a strong currency again until we get the trade deficit way, way down. This will take years.

2008 Jul 11 04:22 PM

[Gross Prophet:]

Well I gotta say I am loving the illiquid volatility of these last few dog days. Caught the Ozzie going up in the early am and coming back down this afternoon. Total profit +101 pips!
Expecting similar action for the next 3 weeks before vacay time.

2008 Jul 11 04:33 PM

[bbzz24:]

Dear Kathy,
Not sure if you are yet at FXCM (i am not), but your root cause analysis seems to have betrayed you once more. The dollar seemed to be kicked around by the prospect of pumping more money to support... housing projects for some white folk that too optimistically put themselves in the homeowners group. Either way, the buck got shot and beat up today as well.

2008 Jul 11 04:47 PM

[Francis Sch...:]

The Dollar is still in a secular downtrend. There is NO bottom building and it appears to fall out of a downflag against the Euro. The suprise could well be a new bottom....To be continued.

2008 Jul 11 05:42 PM

[kashirin:]

Unbelievable. she makes her permabull forecasts twice a day.
What surprise can we have with dollar ?
with crashing US financial system?? Down to 1.5885?
FED is about to pump trillions
What is interesting why she is not fired yet

2008 Jul 12 12:04 AM

[LilBob:]

Whether or not retail sales turn out to be good news depends on your perspective. Retail sales will see a temporary impetus due to the economic stimulus checks but right now strong retail sales would be bad for the price of oil. To bring the price of oil down we need to see a significant decline in retail consumption, which entails a reduction in orders going to China, and the eventual decline in Chinese consumption that falling US consumer goods orders will inevitably bring.

2008 Jul 12 01:13 PM

[yuman:]

How can Oil prices are drive the currency market? For example, oil pushes up AUD? Suppose OPEC cuts supply to bump up prices, how would that drive up AUD/USD?

Let's consider OIL/USD, OIL/AUD and AUD/USD. SImple math gives
(OIL/USD)/(AUD/USD) = OIL/AUD
This relationship ensures that (OIL/USD) and (AUD/USD) moves in the same direction to maintain reasonable OIL/AUD. If we have to find a driver, I'd say that the larger drives the smaller, in terms of trading volume or.

2008 Jul 13 12:14 AM